On 20 July, the price of gold fell sharply, losing 4.3% compared to its closing price on Friday, July 17th. This article explains what happened happened on the market and some misconceptions.
The majority of the gold market analysts explain the recent drop in the price of gold in four events:
- The recovery of the US economy, coupled with a strong dollar and an expected rise in interest rates.
- A slowdown in demand for gold in China.
- The recent liquidation of goods, which is itself the result of the strong increase in dollars and also concerns the end of the economic growth in China.
- Attenuated fund political tensions, illustrated by the attempted resolution of the Greek bailout.
These factors are important. The idea of a long-awaited rise in US interest rates by the Fed weighed on gold prices for some time. And a slowdown in China, the largest consumer of gold in the world, is a major problem.
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This view remains partial. The drivers of gold demand are diverse and varied, and gold keeps a low correlation with other commodities and other asset classes. Moreover, gold demand in China remains healthy, China Banque Populaire has increased its gold reserves by 57% since 2009.
Finally, a stronger dollar and the long-awaited rise in US interest rates are likely factors whose impact is « over-estimated » the gold price. It would be surprising that the expectation of rising US interest rates is not already impact the price of gold. Despite the dollar index, up 12.5% in 2014, the price of gold in dollars has stagnated.
Why the gold price has tumbled ? What’s happened ?
Monday, July 20, 2015, the price of gold fell during the opening hours of the Asian market. The price rose from $ 1134.14 an ounce (closed Friday) at $ 1086.18 an ounce, down 4.3%. He quickly rebounded to stabilize a little above US $ 1,100 / ounce.
This fall was precipitated by extensive trade on Globex platform on COMEX and the Shanghai Gold Exchange (SGE). The data show that 4.7 tonnes were delivered to the Shanghai Gold Exchange at 2:29 BST – matching enormous amount in a very short time. Normally, a little over 40 tons of gold are traded in one day. At the same time, volumes have a peak on COMEX. Both operations were carried out during periods of low market liquidity.
The price fell to the lowest since Monday. With thin trading volumes, and a feeling that the gold market is at low levels, the price has now fallen below $ 1.100. This is the lowest price level since Q1 2010.
Big speculations on markets.
The recent fall in prices was triggered by individual trading positions. These trades are not representative of the general dynamics of supply and demand.
In thin trading conditions, these actions have a significant impact beyond the scale / volume ratio of all matching net flows; they are often revealing and can amplify the feeling of the capital market in the west. But although these traders offer a depth of liquidity in the market, they are shaping demand in the long term. These types of « trades » were a feature of the COMEX in the past, but they are less typical of the EMS, where transaction volumes are lower, although more and more quickly.
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There has been speculation as to who makes the business of EMS. The Financial Times drew parallels with similar trades on other metals in China recently, such as nickel and copper.
Nevertheless, short-term speculative transactions, divorced from physical deliveries and amplified by leverage, are likely to remain focused on the COMEX, rather than the exchanges that have been developed to facilitate greater access to gold physical, such as EMS.