Gold futures fall close to three-year low

TradingPub Admin | June 26, 2013

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If you want some free trading education that involves gold and how speculation can affect its price, the sharp declines experienced by the precious metal on June 26 provide a great example.

Sharp decline in price
Spot gold plunged to as little as $1,223.54 an ounce, according to Reuters. This price was the lowest for the contract since August 2010. August gold also declined sharply, bottoming out at $1,223.20. 

This comes after the precious metal fell into a bear market in April. Previously it enjoyed 12 straight years of gains and reached a record high of more than $1,920 per ounce in September 2011, Bloomberg reports.

"The sell​-off is a continuation of the response to concerns over the Fed tapering stimulus," Bart Melek, who heads up commodity strategy at TD Securities in Toronto, told the news source in a telephone interview. "We'll need to see evidence of more physical buying and demand from central banks before it really turns around. No one wants to catch a falling knife."

Rough quarter
As a result of the steep drops in price that the precious metal has incurred recently, it is currently on par to record a loss of 23 percent in this quarter, according to the new source. In the event that this is the case, it will represent the sharpest quarterly decline for the metal in London since at least 1920.

Reuters has provided slightly different data, indicating that the precious metal is currently on track to drop 22.8 percent during the quarter. Such a drop for a three-month period would represent the greatest for such a time since at least 1968, which is when the media outlet started collecting data on the matter.

QE in spotlight
The plunging price for the precious metal was largely attributed to quantitative easing and the speculation surrounding when it will be reduced and later be cut off altogether. During the week ending on June 21, Federal Reserve Chairman Ben Bernanke told members of the media immediately following a meeting of the Federal Open Market Committee that it is entirely possible that the central bank could start lowering QE in 2013, and then end it next year.

During the following week, some data pointing to strength in the U.S. economy helped support this notion that the current asset purchases could be altered, Reuters reports.

According to data provided by the Commerce Department, housing prices surged in May, according to the news source. In addition, orders for durable goods were robust. Also, consumer confidence increased. Measures of this sentiment are crucial, as consumption accounts for roughly 70 percent of all economic activity and is a major contributor to the job market.

"The raft of figures that came out of the U.S. all pointed to a stronger growth pattern, which pushed the dollar higher," David Lennox, an analyst at Fat Prophets, told Bloomberg. "That's two nails in the coffin for gold: a stronger U.S. dollar and expectations that quantitative easing will be scaled back." 

Sean Corrigan, chief investment strategist at Diapason Commodities Management, told Reuters that the decision making of global investors has changed, as they are not trading gold for the same reasons as before.

"We bought gold for two reasons - because we were worried about the inflationary impact of policy and because we thought the financial system was going to fall apart," Corrigan stated. "Although it may be completely the wrong judgment, the market has decided that none of those at the moment is a concern."

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