By David Berman
Gold isn’t having a good day, suggesting that havens can turn into vortexes very quickly. In midday trading on Wednesday, gold in New York dipped to $1,784 (U.S.) an ounce, down more than $44. That brings the total decline over the past two days to 5 per cent – which, according to Bloomberg News, marks the biggest reversal in 18 months.
The declines come just a day after it hit a record high of $1,917.90 an ounce earlier on Tuesday amid concerns about – well, everything. Indeed, gold has become the go-to investment of choice among investors looking for shelter from inflation, deflation, slow economic growth, stimulative monetary policy, financial crises, debt crises and, of course, good old jewellery demand.
Gold stocks, which lagged the price of gold when it was charging higher, are getting beaten up worse now. The NYSE Arca Gold BUGS index was down 3.3 per cent in midday trading, following a 3.6 per cent decline on Tuesday.
There aren’t a whole lot of credible explanations for gold’s slide, other than “profit taking” – especially when you consider that the stock market appears to be betting that the Federal Reserve will give the flagging U.S. economy a little boost with additional monetary stimulus, a move that is normally associated with stronger gold prices.
At the same time, though, investors are retreating from other typical havens, including U.S. government bonds. The yield on the U.S. 10-year Treasury bond rose above 2.19 per cent on Wednesday, just days after falling below the 2 per cent mark. (Yields fall as bond prices rise.)
Paul Burchell at Dundee Securities Corp. remains bullish on gold, and feels that its run can continue until interest rates rise sharply – a prospect that has diminished considerably with the Fed recently promising to keep its key rate exceptionally low for at least another two years. However, corrections are to be expected.
So how far can gold fall? Mr. Burchell thinks that the severity of the correction can be influenced by the preceding rally – a potential "uh-oh" moment for gold investors given the strong gains this year.
“On average, approximately 44 per cent of the gains made in the price of gold during rallies have been eroded in subsequent corrective periods,” he said in a note, using data going back six years.
Gold began its most recent tear on July 1, rising about $435 an ounce, or 29 per cent, by Tuesday’s intraday high. According to our calculations, an average correction of 44 per cent would cut the price by about $191 an ounce. That would bring the price of gold back to $1,729 an ounce or just $55 below its current price.
Hey, using this calculation, the correction is almost over!
Disclosure: None
