The selloff in gold that cut futures 13 percent over two days was sparked by investor concern that European governments may have to follow Cyprus in selling part of their holdings, according to Goldman Sachs Group Inc.
The slump, which drove prices to their lowest level since January 2011 today, was exacerbated as the metal fell below so- called technical-support levels, analysts including Jeff Currie and Damien Courvalin said in a report dated today, entitled “There Are Weeks When Decades Happen.”
Gold has plunged into a bear market as investors reduced holdings in exchange-traded products amid signs the U.S. economy is recovering, paring haven demand. Goldman said April 10 the turn in the gold cycle was quickening and investors should sell the metal. The drop in the past two days was one of the largest corrections in modern history, according to Deutsche Bank AG.
“The sharp selloff in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks,” the Goldman analysts wrote in the report dated today.
Bullion for June delivery was 1.3 percent higher at $1,378.50 an ounce on the Comex at 5:33 p.m. in Singapore after losing as much as 2.9 percent to $1,321.50. Futures plunged 9.3 percent yesterday after entering a bear market last week, falling more than 20 percent from the record close in 2011.
Cyprus, the fifth euro-area member to gain a bailout, was told by its partners last week that it must keep its commitments to sell so-called excess gold. The market was probably starting to price in the prospect that members of the euro zone other than Cyprus might be forced to sell gold to raise funds, Peter Richardson, an analyst at Morgan Stanley, said yesterday.
Central banks hold about 19 percent of all gold ever mined, and last year they boosted holdings by the most since 1964, according to the London-based World Gold Council. The U.S. and Germany are the biggest holders, with the metal accounting for more than 70 percent of their reserves. Cyprus owns 13.9 tons.
The decline in prices was exacerbated by the breach of a key technical-support level at $1,530 an ounce, and then at the $1,434 200-week moving average, triggering the largest one-day drop, the Goldman analysts wrote in the report. Support levels are marked by clusters of buy orders.
Gold’s slump caught everybody by surprise, according to Dominic Schnider, head of commodities research at UBS AG’s wealth-management unit. The selloff was driven by concern that the U.S. Federal Reserve may taper its stimulus program, technical factors and comments from European Central Bank President Mario Draghi, Schnider said in a phone interview today.
Goldman said in today’s report that it was sticking with its price forecasts, as well as with a recommendation that investors should sell the metal. Still, its so-called stop was cut to $1,400 an ounce, the report said. Gold futures dropped below that level yesterday.
“The most recent ETF holdings showed acceleration in the liquidation of length, which points to a broad-based selloff extending beyond the futures markets with potentially more room to go,” the Goldman analysts wrote in the report today. ETF refers to exchange-traded funds, which trade like shares and enable investors to hold commodities without taking delivery.
Holdings in the SPDR Gold Trust (GDTRGOLD), the biggest ETF backed by bullion, fell to 1,154.34 metric tons yesterday, the lowest since April 2010, data on the company’s website showed. That’s 15 percent, or 199 tons, below the peak reached in December. Holdings in all ETFs compiled by Bloomberg dropped 1 percent to 2,382.43 tons yesterday, the biggest loss since Feb. 21.
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