Panic selling across the globe as margins were called and sell stops hit has resulted in the largest drop in gold prices since 1983. Rumors swirled Monday that 400 tons of gold was dropped into the market in a forced sale, adding to the chaos. Stock markets were down worldwide, as the yen rebounded against the dollar and oil hit an eight month low.
Everyone was hoping that things would calm down over the weekend after the big drop in precious metals and a declining stock market, but market watchers were disappointed when a midday plummet in gold and silver occurred in Asia, on the back of soft economic data from China.
This scared off the physical bargain hunters in China and India, and prices trended lower into the London open. In Europe, the lingering fears that the ECB and/or IMF could force Italy (the world’s 4th largest holder of gold) to sell off reserves to finance a bailout as they did tiny Cyprus, insured the fall continued.
Physical buying in the U.S. was extremely robust, with several online distributors’ sites crashing or slowing to a crawl, but they could not turn the tide against the tsunami of paper. Over 368,000 contracts were traded Friday, almost twice the normal volume. Most of those contracts were shorts. Friday’s 20% decline broke the last “reaction low” on the monthly gold chart, but even after two trading days of massive losses, the market is still above the 38.2% Fibonnaci retracement of $1285/oz. (using the low of $255 in 2001 and the high of $1923 in 2011.)
There is still no major news to explain the panic, and as said before, physical buying on the retail level is at extraordinary levels. Later this week should clarify whether this was the end of the secular bull market in gold, or just a massive paper shakeout.