Speculation in Gold Futures Blamed for 5% Plunge

The price of physical bullion and Gold Futures rallied in Asia and London trade Thursday, at one point recovering more than a third of yesterday’s sharp $100-per-ounce decline to touch $1725. Global stock markets also rallied as commodities rose, but the Euro currency slipped further to new 1-week lows. Silver Bullion briefly rose back above $35 per ounce – a three-decade record when breached in March last year, but still 6% below Wednesday’s early jump to 5-month highs.

Yesterday’s plunge in physical and Gold Futures pricing “makes it quite clear that the previous rise…had been driven mainly by speculation,” says today’s note from Commerzbank’s commodities team. Traders and analysts variously point today to Fed chairman Ben Bernanke’s semi-annual testimony on Capitol Hill, profit-taking or month-end book squaring by investors, a large sell order in Comex Gold Futures – put at 31 tonnes or perhaps 93 tonnes – or alternatively a “fat finger” typo by a US trader, a rumor swiftly denied by the CME exchange on Wednesday.

Overall, the number of open contracts in Comex Gold Futures shrank by 2.3% yesterday, unwinding the previous two session’s growth and equivalent to some 35 tonnes.

New York’s giant GLD gold trust meantime added metal on Wednesday, extending February’s 13-tonne increase by another nine to reach above 1293 in total, an 11-week high. The largest 1-month rise since November, that takes the $70bn trust’s gold holdings back to a level first seen just before their historic peak of June 2010. Yesterday’s trading volume in the GLD Gold ETF was the strongest since late September. “We think a large part of why gold conceded so much came down to three other factors,” says UBS strategist Edel Tully. “$1800 was proving to be too much of a hurdle and a certain staleness had entered the market; [Gold Futures ] positioning had increased very swiftly in recent weeks; and physical demand has been non-existent of late.”

In the United States, Gold Bullion coin sales to authorized dealers slowed sharply in February said the US Mint Wednesday, dropping 83% from January and falling by nearly three-quarters from Feb. 2011. Totalling 21,000 ounces, last month’s sales of Gold Eagle coins were the lowest sine June 2008.

Gold imports to Turkey – the world’s biggest producer of gold coins – meantime ticked down to 2 tonnes from 3 tonnes in Jan., the Istanbul Gold Exchange said today. In Asia this morning, “It’s been a long time since we saw such decent buying,” one Hong Kong-based dealer told Reuters, with “decent buying” reported by other traders on the dip below $1700 per ounce. Indian retailers also saw stronger sales today according to newswire stories.

“We’ve seen physical flows coming off steadily since the beginning of February,” agrees Walter de Wet at Standard Bank in London. “The physical demand is just not there…and you really need that on top of the financial demand to push gold much higher. “We had a sense that the [Gold Futures ] market was increasingly pricing in QE3, and obviously Bernanke has put a dampener on that.”

Calling a recovery in US data “frustratingly slow” at the start of February, US Federal Reserve chairman Ben Bernanke yesterday said it was “uneven and modest by historical standards.” “Bernanke’s comments seem to have eliminated hopes of US quantitative easing coming anytime soon,” believes William O’Neill at Logic Advisors in New Jersey, speaking to Bloomberg last night. By not promising a fresh dose of Treasury-bond purchases, “It almost seemed as if Bernanke was trying to take the steam out of the commodity market.”

Repeating his promise of near-zero interest rates until 2014, Bernanke was accused by Republican Congressman and presidential hopeful Ron Paul of “stealing wealth” at yesterday’s hearing. Paul added that “nobody believes” official US inflation data.

As European banks meantime received the €529 billion in 3-year loans they requested from the European Central Bank’s LTRO program today, the International Swaps & Derivatives Assocation, adjudicators of credit-default insurance events, announced that a “credit event has not occurred with respect to [last week’s] Hellenic Republic restructuring” which sees private-sector holders of Greek government debt losing some 70% of their investment.

Although the situation is “still evolving” as ISDA notes, the decision means investors holding credit-default swap insurance in Greek debt cannot claim on their CDS. New data today said that Eurozone unemployment rose in January to a new record for the 17-nation currency union at 10.7%. Manufacturing activity continued to contract in Feb., according to the latest PMI reports.

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