Meltdown? Gold below $1,600; Equities plunge

In a decline reminiscent of last month’s ruthless rout, spot gold prices fell more than $60 an ounce last night and, at 11pm UAE time, fell to $1,595 per ounce (albeit briefly) – below the critical $1,600 per ounce levels.

Although spot gold prices recovered a bit in the morning today, they were once again trading at $1,602.61 on Wednesday at 1.00pm UAE time, periliously close to the $1,600 threshhold. The precious metal is now down almost 14 per cent over the past 30 days, has surrendered all gains made in the past two months, and is back at mid-July levels as investors dump gold to service margin calls on falling global equities.

Gold was up as much as $1,678 an ounce earlier yesterday but the metal failed to sustain the gains and came crashing down on heightened concerns over a Greek default. Spot prices fell Tuesday, along with other safe-haven investments, after Ben Bernanke, the head of the US Federal Reserve, said the American central bank was ready to do more to support economic activity.

Bernanke said the US central bank was “prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability” – hinting that the quantitative easing program could eventually see a third tranche.

On the other hand, the yellow metal lost a bit of its ‘safe haven’ glitter last month, which saw it plunge by 20 per cent in less than three weeks of making its lifetime record of $1,920.30 per ounce on September 6, 2011. By September 26, however, prices had plunged to $1,530 per ounce intra-day before recovering on bargain buying support.

“Gold had a torrid time last week and I think we have to re-classify gold simply as an asset class in its own right,” said Gerhard Schubert, Head of Precious Metals, Emirates NBD, in his weekly precious metals report sent to 'Emirates24|7'.

“The safe haven status becomes debatable if gold moves more than $250 in total down and up in a single day, like it did early last week,” he said. The bank maintains a neutral outlook on gold for the current week, with buying support expected to come from India, where traditionally strong demand gets further strengthened during the Diwali period, which this year falls on October 26.

Globally, however, the world economy is slowly but steadily inching towards the dreaded double-dip as illustrated by a simultaneous decline in shares and commodities, as was the case yesterday – and this morning – when along with the decline in gold and silver, major stock indices are moving southwards, indicating investor apathy.

As Moody’s Investor Services downgraded Italy’s credit rating by three notches, adding to concerns that Europe’s debt crisis will worsen, the euro weakened against the yen and dollar while most Asian stocks fell. “There has been see‐saw action in all the major stock markets and sell‐off in commodities, whilst the US dollar is strengthening,” wrote Schubert. While the market might have factored in the Eurozone chaos, it certainly hadn’t incorporated the inaction and obduracy of the region’s political leadership, which is threatening another ‘Lehman moment’ that would pull the global economy down into another recession that the world can ill-afford at this moment.

The world’s situation, as one expert described to this journalist, is like an aircraft flying at 40,000 ft with multiple engine failures and going through major turbulence with its pilots quarrelling amongst themselves about who gets the parachute with lesser holes in it.

In a rather unexpected turn of events, Athens has admitted it would not meet its 2011 and 2012 deficit forecasts after a Monday night meeting of EU, IMF and ECB officials agreed to postpone the decision on releasing Greece’s next tranche of bailout money – €8 billion – until mid-November.

“Until mid-November there is no problem,” Evangelos Venizelos, the Greek Finance Minister, said while briefing reporters in Athens yesterday on his country’s finances. “We have done a cash flow forecast and our estimates are secure,” he said. However, experts reckon that the cost of uncertainty will be borne by markets, including gold. And if that wasn’t enough, there are growing concerns that China – arguably the aircraft’s only functioning engine – could stall as well. “Towards the end of last week… the US was no longer simply pointing the finger at the Eurozone.

There is also growing uncertainty about the state of the Chinese economy,” said Schubert. “A soft landing with reduced growth rate would be fine but the signs are that a hard landing cannot anymore be excluded, and that could help push the major economies back into recession,” he said.

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