Gold falls below $4,000 an ounce as market ‘froth’ subsides

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The price of gold fell below $4,000 an ounce on Monday, as some of the “froth” was removed from what industry executives said had become an unsustainable rally.

Gold fell to $3,980 an ounce during trading on Monday after rising 27 percent in just seven weeks to a high of $4,381 on October 20, in what some in the sector described as “speculative” positions by investors.

The price has fallen more than 9 percent in a week from its recent high.

Industry executives said they expect prices to enter a deeper correction in the coming weeks, with the decline hailed as a “healthy correction” to a sharp rise that has become unsustainable.

As bullion traders gather this week for the sector’s largest annual conference, the excited mood of participants was punctuated by sudden warnings that prices could fall further before they recover.

“I think a lot of people in the industry would actually welcome a deeper correction than we have at the moment,” John Reed, a market strategist at the World Gold Council, which represents gold miners, said on the sidelines of the London Bullion Market Association conference in Kyoto.

Another senior executive at a major bullion trading bank put it more bluntly: “Only crazy people would have thought gold would go this high.”

Gold’s rise this year was driven by demand from investors who view it as a hedging tool in the face of geopolitical uncertainty, high levels of government debt and a weak US dollar. Central banks are also buying gold as part of diversifying their assets away from the dollar, although these purchases have slowed in recent months, according to International Monetary Fund data.

The price of gold has risen by more than two-thirds this year to reach its latest peak, exceeding the $3,000 threshold in March and then surpassing $4,000 in early October.

However, the recent jump in prices has many in the industry blaming “speculative” positions for raising prices too high, too quickly and creating an unsustainable rally.

“We are definitely in a correction phase, and corrections are not going to happen in a few days,” said Nicholas Vrabel, global head of institutional markets at Australian company ABC Refinery. “I wouldn’t be surprised to see gold rise to $3,700 before retesting new highs.”

“Prices don’t usually continue to rise,” said Paul Fisher, the outgoing head of the London Stock Exchange Association, adding that the recent rise was due to “froth” in the market.

“That’s why last week [move] Very important. “It just takes that foam out of the market,” he said. “You can get a little bit of a correction because that takes out the speculative positions, and then the market is ready to come back up again. And the price can go up from here.”

Many experts and analysts say they remain confident in gold’s long-term prospects. Banks including HSBC, Bank of America and Société Générale have a price target of $5,000 for bullion next year.

However, even the bulls are concerned about a near-term pullback.

“A few people I talked to think $3,500 would be healthy for the gold market because it would still be a ridiculously high price,” said Reed of the World Gold Council, which sponsors a gold-backed exchange-traded fund. “From my perspective, I think it’s definitely possible.”

One question facing the market is how sustainable the recent interest from retail investors – who have been queuing up in Australia and Japan in recent weeks to buy small gold bars and coins.

The other unknown is whether central banks – which have bought record levels of gold in the past three years – will slow their purchases due to rising prices. Some smaller central banks are even forced to sell gold to maintain their allocation, because high gold prices have pushed up the proportion of their assets represented by bullion.

Ruth Crowell, chief executive of the LBMA, said gold was on a “strong upward trajectory” and had become “mainstream” for investors.

“We have seen volumes rise; investors around the world, at a mainstream level, want some exposure to gold,” she said. “For me, it doesn’t feel like a moment, it feels like a new chapter.”