In just the last few trading days, the price of gold has tanked by $50 per ounce, or just over 4%.
Over the past month, gold has lost $100 per ounce, or 8.3%, bringing the yellow metal to its lowest in five years.
The gold sell-off has some precious metals investors' nerves rattled. Gold sentiment right now is worse than it has been with other sell-offs.
So what's really causing this gold price plunge, and, more importantly, what should you expect next?
Here's a close look at what's going on with the price of gold...
What's Next for Gold After Bear Raid
On Sunday night, when many markets were shut and liquidity was low, about $2.7 billion worth of gold futures were dumped on the Comex in under two minutes. At one point, in the space of a single minute, 7,164 contracts equal to about 22 tons were traded.
At a time of day with so little liquidity, and such a large volume being sold in a very short time period, it's hard to imagine the cause being anything other than forced selling for the goal of driving gold's price lower.
According to The Wall Street Journal, "In Shanghai, close to five metric tons of gold was sold on the Shanghai Gold Exchange in a two-minute window just before 9.30 a.m. local time, in a market where the normal daily volume traded is 25 tons, the ANZ report said."
"ANZ added that there was an unusual spike in trading volumes in a gold futures contract in U.S.-based Comex, just before Shanghai opened."
Ross Norman, chief executive of bullion brokerage Sharps Pixley, said the volume of selling in such a narrow window suggests a careful effort to short the market and bears no relation to market fundamentals.
"They weren't looking for the best price, they were looking for the biggest impact," he said.
It's called a bear raid. As Money Morning Chief Investment Strategist Keith Fitz-Gerald explained yesterday, Chinese traders capitalized on low liquidity conditions stemming from Japanese markets being closed for Umi no hi, or Ocean Day, a national Japanese holiday.
Since this attack on gold followed China's gold reserves report, some suggested this was a very strategic move...
China's Effect on the Gold Price Slump
The People's Bank of China reported an update last Friday to its official gold reserves. By most accounts, it turned out to be a real yawner.
The central bank now officially holds 1,658 tonnes, or 57% more than the 1,054 tonnes reported in April 2009.
I, like many close observers, expected a number much closer to 4,000 tonnes, given the relentless gold imports into China over the last several years. I have some serious doubts about the veracity of the new official reserves number.
Another interesting event is the China stock market crash, which brought the SSE Composite Index down from 5,166 to 3,686 in about three weeks from June 12 through July 3.
Many will argue that such an event should lead the Chinese to buy gold as a haven against stocks. But a counter argument is that many Chinese already owned gold and may have recently been selling in order to meet margin calls on their stock portfolios.
Some have suggested that there was a coordinated effort to help China acquire more gold at low prices. Indeed, there is potential for some interesting interplay between recent events.
China's stock market crash, the subsequent report of official reserves that underwhelmed the markets, and the bear raid certainly give China another chance to acquire more gold at a lower price.
And they could have even more opportunity in the weeks and months ahead...
Other Factors Fuel Gold's Fall
Weakness in the gold price was encouraged by the reversal that started in the U.S. Dollar Index in the third week of June. With gold priced in U.S. dollars, dollar strength will typically weigh on gold prices.
As the chart below shows, the dollar resumed its climb higher in late June, hitting a three-month high against the index's basket of currencies. And the dollar capped off with a mini-surge last week.
(Note: Belying gold weakness in U.S. dollar terms, however, is its performance in a number of other important currencies. Gold priced in the Brazilian real, the Indian rupee, the Japanese yen, the Russian ruble, and the South African rand is typically priced within about 20% of its peak. This demonstrates that large portions of the world have not seen gold enter a multi-year bear market, but instead hold its value rather well.)
Throw in the incessant talk of Yellen raising rates - though far from a sure thing this year - and you have the perfect storm against gold prices.
So given that certain technical price levels have been breached, new lows are very possible.
But don't think gold's bull is now dead...
What's Next for the Price of Gold
In practice, bull markets end when "everyone knows" that the sector can only go up.
We're nowhere close to that kind of environment today. Finding bearish gold headlines is way too easy - like "Let's be Honest About Gold; It's a Pet Rock" in The Wall Street Journal - and that's not how bull markets end.
So what can we expect next?
Technically, support for the gold price lies at previous support and/or resistance levels. That points first to $1,040, then to the psychologically important $1,000, and finally to $957, which would represent a 50% retracement of its $1,914 peak in 2011.
Yes, gold could well be headed lower before it finally bottoms. But gold's bull market is still far from over.
My advice: Hang onto your "pet rocks."
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