Start of slide or opportunity?

Examining gold's recent slide
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Published : 02/25/13
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After enjoying a long period of stability for the past several months at the $1,650 to $1,700 an ounce level, gold dipped below $1,600 on Feb. 20, closing at $1,588.50 an ounce in the London markets. Gold had reached a low of $1,564.30 in London during the day’s trading, and on Feb. 21 gold hovered around the $1,575 an ounce level.

The drop created a seven-month low for gold that represented the worst one-week drop since May 2012. It was also the first time that gold closed below $1,600 an ounce since Aug. 14, 2012, when it closed at $1,597.75 an ounce.

After the most recent dip, Citigroup lowered its ratings on several gold mining companies and wrote in a report, “The problem with gold is that it is a very ‘long cycle’ metal and if it IS in the process of peaking now, then history suggests that it could go into hibernation for a long, long time.”

Under that logic, if gold has already peaked, then it may have further to fall. At this time in 2011 gold was at the $1,400 an ounce level, and back in February 2008 it hovered at the $1,000 an ounce level, reaching a five-year low of $712 an ounce in the fall of 2008.

An impetus for the recent sell-off was the release of the January 2013 meeting minutes of the Federal Reserve’s policy committee. The report suggested that it may scale back its monetary stimulus. This reduced gold’s appeal as an inflation-hedge.

The drop below the psychological barrier of $1,600 an ounce was also caused in part by economic data showing that the U.S. economy is slowly improving and a growing perception that the global economy has stabilized. This stability can lead people away from assets like gold and silver, and toward assets perceived as riskier.

Some people saw buying opportunities in the quick drop. APMEX’s Bullion Center on eBay reported that it enjoyed its second best sales day on Feb. 20, stating in a press release that buyers concluded that “precious metals were on sale and at a discount relative to the expected future values.”

Wild price swings have the greatest impact on coins that trade at levels close to bullion. This group includes both traditional bullion products and many collector coins with values closely tied to bullion.

A quick drop in the price of gold can have a big impact on dealers big and small who are working on a tight profit margin with bullion products. ■

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