Gold: Price drop likely to spur demand

UNITED STATES October 06 2016 11:47 AM

NEW YORK (Scrap Register): Following a remarkable performance year-todate, the gold price fell by over 3% on 4 October, taking it below $1,300 an ounce for the first time since the Brexit announcement in June 2016, according to World Gold Council.

The move seems to have been driven by speculation of a scaling back in the ECBs asset purchase programme, combined with rising expectations of a US rate hike in December. 

The move was exacerbated by technical levels, tactical positioning in derivatives markets and a national holiday in China. Looking forward, we believe the price dip will offer a good buying opportunity for consumers and long-term investors. 

In addition, even though central banks may start to normalise monetary policies, such a prolonged period of extraordinary measures has led to a structural shift in asset allocation that will linger much longer. 

In this new normal of lower returns and higher uncertainty, gold has an important role to play in the portfolios of investors large and small. 

For the past 3 months, the gold price traded in a range of $1,310/oz-$1,370/oz. In the early hours of October 4, the price started consolidating near the lower end of the range. 

This was driven by slightly better-than-expected economic news in the US and recent bullish commentary by some of the Fed’s FOMC members. The media also reported that the ECB may look to scale back its €10 billion monthly bond purchase programme. 

Once the gold price pushed below US$1,310/oz an ounce, representing gold’s 100-day moving average, technical selling increased sharply, exacerbating the fall and triggering stop-losses and further tactical selling.

Meanwhile, Chinese investors, who have historically bought on dips, were celebrating Golden Week national holiday, leaving domestic markets closed.