Gold Price Rebounds After 3% Drop

GOLD PRICE NEWS – After sliding as low as $1,531 per ounce overnight, the gold price rebounded Wednesday morning back to $1,541.  Gold price volatility has picked up in recent sessions with the yellow metal falling $46, or 3%, off its all-time high of $1,577.50 posted earlier this week.  Silver has been even more volatile, plunging from a high of $49.79 per ounce to a low last night of $40.33 – a stunning 19% drop in a mere 48 hours.

On Tuesday, the gold price retreated $7.06 to $1,538.56 per ounce amid a widespread sell-off in the commodities complex.  The price of gold reached an intra-day low near $1,527, before paring its losses in afternoon trading.  The SPDR Gold Trust (GLD), a proxy for the gold price and the world’s largest gold ETF, settled lower by $0.53 at $149.88 per share.  Silver once again moved much more violently than the gold price, plunging $2.25, or 5.1%, to $41.74 per ounce.  The price of silver fell from over $45 to an intra-day low of $40.60 on Tuesday, before rebounding modestly.

Precious metals have declined despite the fact that the U.S. dollar has remained weak.  The decline can be attributed to profit-taking and massive liquidation of gold and silver futures on the COMEX from momentum players, who fled as prices broke down.  Three hikes in margin requirements in one week by the CME group added to the selling pressure.

The sell-off in silver and gold prices can also be attributed to the recent overbought condition and excessive bullish sentiment prevalent in these markets.  Market Vane’s bullish consensus on silver reached 97% last week.

Others pointed to the prospects of tighter monetary policy across the globe another catalyst for the decline.  On Tuesday, the Reserve Bank of India (RBI) became the latest central bank to raise interest rates.  Many expect the ECB to follow suit this Thursday.  In the U.S., Kansas City Fed President Thomas Hoenig – who is no longer an FOMC voting member – stated at a banking conference in Washington, D.C. that the Federal Reserve needs to “slowly reverse” monetary policy to “calm inflation fears.”

Noted business historian and Harvard University professor, Niall Ferguson, echoed Hoenig’s views on inflation when he argued in Newsweekthat the Fed continues to monitor the wrong inflationary measures.  “The reason the CPI is losing credibility is that…it’s a bogus index,”Ferguson wrote, “The way inflation is calculated by the Bureau of Labor Statistics has been ‘improved’ 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent. Yes, folks, double-digit inflation is back.”

Dr. Martin Murenbeeld of DundeeWealth Economics, a long-time bull on the gold price, offered a contrasting view to Ferguson in his latestGold Monitor.  Murenbeeld contended that the Fed “dare not do other than foster economic growth as best it can” by ensuring the monetary spigots remain open.  The fact that the gold price and other commodities rise as a result is an unfortunate consequence, from the Fed’s perspective, but one that is secondary to economic growth.

Murenbeeld subsequently discussed his ongoing concerns with the European sovereign debt crisis, which has recently taken a backseat to news involving Osama bin Laden’s death, the Fed, Libya, Japan, and several other items.  “The crisis in the Eurozone is fundamentally a Eurozone banking crisis (banks are full of government paper),” he continued, “and any disasters will have to be met with the ECB printing press.”  The gold price would likely respond positive to such a development, according to Murenbeeld.

David Einhorn, President of $8 billion hedge fund Greenlight Capital and another long-time bull on the gold price, offered his own perspective on the Fed’s latest policies, particularly QE2.  In his firm’s most recent investor letter, Einhorn wrote that “It appears that in response to quantitative easing, investors now fear inflation…The money that the private sector would have lent to the government, had the Federal Reserve not printed the money instead, has gone to other goods, notably commodities and stocks to the extent investors see them as a better inflation hedge than bonds.”

Einhorn went on to say that investments tied to the gold price comprise one of Greenlight’s four largest positions, which the firm is using as one of its primary inflation hedges.  Given Einhorn’s positive outlook on the gold price, it appears that he too sees the Fed maintaining its dovish outlook for the foreseeable future.

(Source: http://www.goldalert.com/gold-price-rebounds-after-3-drop/)