Gold plunged $104 in New York, capping the biggest drop since March 2008, on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a haven.
Bullion has tumbled more than 7 percent in two days, erasing gains in the past two weeks that sent the metal up as much as 16 percent since Aug. 5 to a record $1,917.90 an ounce yesterday. On Aug. 16, Wells Fargo & Co. said in a report that rising speculative demand from investors had pushed the market into a “bubble that is poised to burst.”
“This is liquidation from a crowded trade,” Adam Klopfenstein, a senior market strategist at MF Global Holdings Ltd. in Chicago, said in a telephone interview. “In the short run, there’s more optimism and that doesn’t bode well for gold. Investors have been using gold more as a fear barometer than a proxy for inflation.”
Gold futures for December delivery plunged 5.6 percent to settle at $1,757.30 at 2:02 p.m. on the Comex in New York, the biggest decline for a most-active contract since March 19, 2008.
“The motions that you are seeing are now indications of a market pop,” Erik Davidson, the deputy chief investment officer at Wells Fargo and one of the authors of last week’s report, said in a telephone interview. “People should keep in mind that a reserve currency does not fluctuate as much as gold.”
U.S. equities gained after reports on durable-goods orders and home prices beat analyst forecasts. The dollar rose against a basket of six major currencies amid speculation about whether Federal Reserve Chairman Ben S. Bernanke will say this week that the central bank is willing to provide more stimulus to the economy. Central bankers meet this week in Jackson Hole, Wyoming, to address the U.S. recovery.
“Investors are paring down positions in gold on expectations Bernanke will do something to boost equity prices,” Klopfenstein of MF Global said.
Gold has gained 24 percent this year as burgeoning global debt crises and turmoil in equity markets boosted the appeal of the metal as an alternative asset.
“Europe is on vacation and the sovereign-debt fears are being addressed,” Frank Lesh, a trader at FuturePath Trading, said in a telephone interview from Chicago. “The currency markets are pretty stable and not scaring anybody at the moment.”
In the second quarter, George Soros and Eric Mindich cut their holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by the metal. Paulson & Co., the U.S. hedge fund run by John Paulson, maintained its position of 31.5 million shares, the biggest stake in the ETF.
The SPDR Gold Trust surpassed its equities counterpart as the biggest ETF by market value on Aug. 19. On that day, the bullion fund’s market capitalization rose to $76.7 billion, driven by rising prices of the metal which topped $1,900 for the first time ever on Aug. 22. SPDR S&P 500 ETF Trust, which had been the industry’s largest ETF since 1993, stood at $74.4 billion. As of yesterday, the gold ETF was valued at $73.9 billion, while the equities fund was at $79.5 billion.
“We exited one third of our gold position yesterday, and in retrospect we should have exited 150 percent of our long position,” Dennis Gartman, an economist and the editor of the Gartman Letter, wrote today in his daily report. “The biggest news of all, in our opinion, was that the capitalization of the” gold fund had surpassed the equity ETF.
Japan’s Imperial Palace
“This is classic,” Gartman wrote. “It reminded us of the times past when the valuation of Japan’s Imperial Palace surpassed the valuation of all of California.”
Gold fell from a then-record when Comex owner CME Group Inc. raised margins on Aug. 11. The Shanghai Gold Exchange said higher margin requirements will go into effect from settlement on Aug. 25.
Holdings of bullion-backed ETPs fell for a third day yesterday, sliding 1.1 percent to 2,181.6 metric tons, the biggest drop since January, data compiled by Bloomberg show. Assets reached a record 2,216.8 tons on Aug. 8.
“Gold got pushed up on the idea that Bernanke will announce further quantitative easing,” Patricia Mohr, a commodity-market specialist at Scotia Capital, said in a telephone interview. “Now people are not so sure whether that will happen and that is creating disappointment in the gold market.”
The decline may be a buying opportunity to some investors, said James Dailey, who manages $200 million at TEAM Financial Management in Harrisburg, Pennsylvania.
“A lot of traders and investors who are long-term bullish on gold sold out hoping for a correction because of how much it went up,” said Dailey. “The drivers remain intact. The toughest thing to do is stay invested during the various parabolas and sit through the corrections.”