Gold plummeted $55.90 and marked its worst one day decline in a year. The price of gold measured a decline of 1.5% for the week, after rallying as high as $1,226.50. The impetus for the sell-off was a better than expected employment report, which led to a 1.4% rally in the U.S. dollar. Only 11,000 jobs were lost in the month of November, compared to the median estimate of 125,000, and the unemployment rate came in at 10.0%, compared to the 10.2% consensus estimate.
This positive economic report led to an unwinding of the US dollar carry trade, which has become one of the most crowded trades in the financial markets. Based on today’s market action, investors have taken a small step towards the view that the improved economic data will increase the chances that the Federal Reserve will begin to withdraw liquidity from the financial system and tighten monetary policy at some point in the not-too-distant future. According to the Fed funds futures market, the odds of an interest rate hike by the June meeting have now risen to over 50%.
Potentially marking a short-term high in the gold price was yesterday’s bullish report from Goldman Sachs titled 2010 Outlook: Resource Realignment, in which the investment bank raised its gold and silver forecasts. In the report, Goldman called for a 12-month gold price of $1,350 per ounce and average gold prices of $1,265 and $1,425 in 2010 and 2011, respectively. In addition the firm raised its 6-month and 12-month silver price targets to $21.00 and $22.50, respectively.
While the Goldman report correctly laid out the bullish case for gold by focusing on the positive fundamentals, notably “the low US real interest rate environment,” their timing was called into question. While from a fundamental perspective it is difficult to argue with the logic behind these forecasts, the timing of this report is interesting given the substantial rise in the gold price witnessed over the past 6 weeks. Investment banks, even mighty Goldman, tend to be notoriously behind the curve, upgrading stocks after significant upward moves and downgrading them after bad news has punished a stock. Furthermore, Goldman has been one of the more cautious banks with respect to the gold price. Only with the benefit of hindsight will it be known if Goldman’s upgrade, made on the day gold hit $1,226.50, marked the start of a correction.
Today’s significant decline is a definite cause for concern that the bull market in gold is due for a more meaningful correction. Positions in the U.S. dollar carry trade have attained critical mass and a counter-trend rally in the greenback has the potential to engineer a correction in both the stock and commodity markets. If history is a guide, then the deleveraging and liquidation would pressure the gold price and the gold mining stocks as well. While the fundamentals do suggest much higher prices in the quarters and years ahead, bull markets do not run one-way, and over the course of the rise the bull tends to dismount many of its riders.
Gold Price News provided by GoldAlert.