Gold prices were driven insanely lower today — not by market fundamentals or the latest readings on the U.S. and global economy — but by technical and computer-driven program trading mainly in futures, forward, and options markets.
If anything, this morning’s U.S. economic indicators for retail sales, consumer sentiment, and well-behaved producer prices should have had a positive effect on gold prices. News of a weaker-than-expected economy — particularly with inflation indicators subdued — should shift expectations of future Federal Reserve monetary policy toward more, not less, accommodation . . . and this should be bullish for gold.
Today’s swift decline took gold from an intraday high just over $1,565 in early New York trading to a low of $1,491 — a swing of nearly $75 or 4.8 percent. After this week’s debacle, we should see some bounce back in the days ahead — but short term the market remains vulnerable to more insanity.
Who said markets are always rational? Indeed, the stars remain favorable for gold and rational analysis suggests that prices will go significantly higher over the next few years. I’ve written and talked at length about gold’s very sane bullish fundamentals. Here’s some main points to ponder:
Prospective U.S. monetary policy is not the only bright star for gold.
Europe is sinking into deeper recessions and worsening unemployment that will likely provoke social unrest and political extremism in one country or another. Along with rising expectations of a eurozone breakup, Europe’s mess should prompt more safe-haven demand and high prices for gold.
Even if the American and European economic problems suddenly disappeared, gold prices would still rise higher on the back of emerging-economy central bank demand and private-sector buying in China.
Most analysts have failed to recognize the unique nature of this demand: Gold bought by these central banks and by nouveau-riche Chinese will be held for future generations. Little of this metal is likely to come back to the market anytime soon . . . or even at much higher prices. As a result, the available supply or “free float” of physical metal is shrinking and future demand will have a much more dramatic price effect in years to come.
(The preceding comment appeared earlier today on Twitter @NicholsOnGold. If you’re interested in my brief gold-market commentary most business days, I’d be honored to have you follow me on Twitter.)
