Gold Futures Index (GOLD)

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Is gold price set for crash below $1,000?

By David Lew
After the historic boom, is gold price climbing down to $1,000 per ounce, to confirm to the controversial prediction that noted economist Nouriel Roubini made some weeks back? It looks so as gold is going bearish, in the weight of economic nervousness coming from the two important countries that matter—United States and China.

Now, as gold sank to a three-week low on Friday across the global markets and commodity bourses, some bullion analysts warned that gold price could plunge below $1,000 per ounce if the talks on property bubbles from China and financial risk taking concerns in the US are going to intensify.

“Gold is on a bearish mood these days after the precious metal’s spectacular ascent to the record high of $1,227 per ounce in November last year. Gold price may not boom above $1,227 this year, if commodities get into a slump in 2010. A crash in gold price below $1,000 per ounce can not be ruled out,” said Mark Robinson, a bullion analyst based in Dubai.

According to Robinson, the main problem with gold is that “its price has been over-hyped by some bullion analysts and forecasters.” “It is funny to see so many gold predictions going around in the search engines on the Internet. Gold price is being predicted from $1,000 per ounce up to a whopping $5,000 and even $10,000 by analysts and investors ranging from Jim Rogers, Marc Faber and Nouriel Roubini to research assistants in small broking firms,” Robinson told Commodity Online.

While Robinson agrees that gold is the most valuable asset among commodities and the yellow metal is arguable the best investment asset class in the world, he points out: “But there is so much hype going on in the bullion market on gold price. The hype lacks basic fundamentals like gold mine supply, demand and possible emergence of other commodities like platinum, palladium and silver as equality challenging investments like gold.”

But, all said and done, what are the real reasons that are prompting investors and bullion traders to press the panic button on gold price?

There are three immediate reasons why gold price is plunging.

First, there is so much of paper gold traded in the world, without adequate physical supply to compensate for. According to Jim Sinclair, noted bullion investor and a great champion of physical gold, the emergence of paper gold is creating artificial demand and supply problems in the bullion markets and commodity exchanges.

“Because of paper gold, market games can be played. What cannot be done is for paper gold to produce bullion. The bullies can attack the paper gold market in unison, but they cannot create supply in real bullion with the ease of highly leveraged paper. The pros depend on the under-financed public to stampede under the pressure of fear of loss,” says Jim Sinclair.

Secondly, gold has been under pricing pressure this week as US President Barack Obama's plans to limit financial risk taking raised concerns about diminishing capital flows from banks, which have provided liquidity for gold and commodities investors.

Analysts said while falling prices could offer some good bargains, investors will likely wait to see how long the global stock market plunge continue and how much in speculative long positions is cleared by current selling before returning to buying gold and other precious metals in full force.

At current levels, spot gold has fallen about 3 per cent on the week, the largest weekly drop in six weeks.

The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, halted, with its holdings remaining unchanged at 1,111.922 tones as of January 21 from the previous business day.

Thirdly, gold price is falling prey to what is happening in China. Every investor worth the name has been proclaiming his fascinating investment love for China all these months, arguing that the dragon country is the best bet when it comes to investing in commodities, stocks and real estate.

But the news that is emanating out of China is that the country may be caught in a bubble with property prices as some analysts have warned that real estate investments have ballooned without any proper fundamentals and demand. Even ardent China investor and admirer Jim Rogers has now warned that China is showing symptoms of a property bubble, thanks to unwieldy growth of the country’s properties market. A property collapse in China hits commodities like copper, silver, steel etc hard, pulling down investments into commodities sector, thereby hitting gold price at its heart.

As gold price continues its downward plunge, the US dollar has been rising. Now the US dollar is at a five-month high against the Euro and concerns that the China growth story may get stuck, limiting the need for inflation-hedging assets like gold.

Let us wait and watch where gold market is going to head next week. Will gold price continue to plunge next week? Will the yellow metal pick up the pieces and once against ride on the booming road to price prosperity?

David Lew is a precious metals commentator with Commodity Online. You can contact him at [e-mail]

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