Gold prices seem to have stabilized today, trading once again above the $1,300 an ounce mark.
This follows a tumble yesterday of more than $40 an ounce to as low as $1,284 an ounce. That price was nearly a two-month low and put the precious metal down 23% in 2013.
At that level, gold was trading more than $50 below its 50-day moving average. To technical analysts, this confirmed the downtrend in the precious metal, bringing about a wave of selling by those who strictly follow the charts.
However, there were factors at play in gold's selloff other than technical selling.
Why Gold Prices Fell: Government Shutdown Factor
One reason Wall Street pundits gave for the drop in the gold price was risk aversion because of the partial U.S. government shutdown. In other words, traders sold assets with higher price volatility like gold and other commodities.
But stocks were up and U.S. Treasury bonds were down - only in the wacky world of Wall Street, where, thanks to the U.S. Federal Reserve's quantitative easing (QE), stocks are no longer considered a risky asset, but gold and Treasuries are.
Let's take a quick look at what gold did during the last government shutdown.
In the period between Dec. 16, 1995, to Jan. 6, 1996, gold merely bounced around a bit before falling slightly a few days prior to the actual shutdown.
Translation: The government shutdown was a non-event for the gold market.
Jonathan Citrin, founder and executive chairman at investment advisory firm CitrinGroup, told MarketWatch "Gold... now seems to shrug off the majority of fears in the shadow of yet another round of bickering in the nation's capital."
Why Gold Prices Fell: Wall Street Keeps Selling
The real factors behind yesterday's selloff in gold are not risk aversion due to politicians arguing.
Here is what really happened...
One reason was simply the fact that China is out of action through Oct. 7 for the Golden Week holidays. China has become the largest buyer of physical gold, with expectations that the Asian giant will purchase 1,000 metric tons of gold this year.
This absence of strong physical buying allowed Wall Street to pursue one of its favorite pastimes - selling gold.
And they did not pass it up...
The majority of gold's drop occurred between 8:30 and 8:40 a.m. EDT, when 24,000 gold futures contracts were sold.
Howard Wen, a precious metals analyst at HSBC, told the Financial Times, "There was market chatter of a major U.S. fund rebalancing out of gold."
And indeed there were other rumors of at least two major U.S. funds selling gold.
Wall Street funds were also busy in the options pit.
Kitco cited Thomas Philippides, a broker at Capfeather Brokerage Group. He related that "meaningful order flow" in gold futures options occurred in the November, December, and especially the April contracts. The bets were all on the bearish side, selling calls and buying puts.
Why did this all happen yesterday?
Check your calendar. Not only was it the Chinese holiday, but it was the first day of a new quarter.
The start of quarter is when hedge funds and others get fresh money from clients. And the favorite bet right now of Wall Street short-term speculators is to short gold while betting on Ben Bernanke supporting stock prices.
If the speculators knock down gold prices further though, look for strong physical buying to emerge once again from China and elsewhere in the developing economies.
Gold Steadies After Steep Selloff
Gold Sharply Lower, Hits 7-Week Low, Amid Commodity Market Selloff
Gold Tumbles 3 Percent, Rattled by Fund Trade, Government Shutdown
Gold, Oil and Government Shutdowns
Kitco Market Nuggets:
Bearish Options Activity Seen in Gold