How much further will the gold price fall?

Gold experienced a large sell-off over the weekend. Dominic Frisby analyses the outlook for the precious metal.

(Image credit: © Andrey Rudakov via Getty Images)

Every now and then gold experiences these monster sell-offs late on a Sunday night or early on a Monday morning (depending on where you are in the world).

The market is barely open, thinly traded and so can’t absorb any major trading volume.

Somebody comes along and dumps several billion dollars’ worth and the price crashes.

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We got one example of this on Sunday night.

Gold was already weak going into the weekend. The selling actually started on Wednesday with gold around $1,835 an ounce, but it didn’t feel like anything to panic about. By Friday we were still above $1,800.

Then on Friday we got stronger than expected US employment data. In July, 943,000 jobs were created, said the US Labor Department. That beat consensus expectations of 870,000. Meanwhile, wages rose by more than expected and the unemployment rate fell from 5.9% in June to 5.4%.

The US indices rose as a result, in some cases breaking to new highs, and gold started selling. It lost $40, harsh but not “that” unusual.

Then, at about 11pm on Sunday night, came the big wallop. I had committed the cardinal sin of looking at my phone just before I went to sleep – and as a result I didn’t go to sleep. I even told myself not to look at it, but I still did.

In a matter of minutes gold dropped by almost $100. If you want the actual numbers it went from $1,764 to $1,677, with 90% of that move coming in just 15 minutes. It was a proper flash crash.

I’ve always instinctively opposed gold market manipulation theories. I’ve had many conversations into the early hours with avid gold bugs who know more about it than me, and I’ve never been entirely persuaded.

There is almost always an explanation that comes under the category of incompetence rather than conspiracy, and I’ve always felt that cock-ups are a far greater driver of mankind’s evolution than historians, market analysts and behavioural psychologists would have you believe.

Nevertheless, my immediate thought was that the episode stank of manipulation. It was blatant. Often your first instinct is the right one. Often it isn’t. But this was so obvious it was verging on the shameless.

When you are selling something you want to get the best possible price for it. Why would you dump several billion dollars’ worth of something onto a market when there are hardly any buyers around? Surely you would wait until markets are active.

Let’s say you have a banana business. You wouldn’t walk into the market and sell all your bananas late on a Sunday night when there’s nobody there. You’d at least wait until Monday when there are customers walking about.

Nor would you buy next year’s stock of bananas when there are none for sale. You would wait until there are plenty of vendors.

The obvious explanation is that somebody somewhere wants the price down, and they were beating it lower when there was nobody about.

Who would want the price down? It might be some fund with deep pockets that is playing games. It might be some government that doesn’t want the gold price higher, because a higher gold price is the canary in the coalmine of their monetary policy.

Then again – there is another, easier explanation. Somebody was forced to dump. Somebody, some fund somewhere, got a margin call at some point over the weekend after Friday’s sell-off, and they had to liquidate.

It’s happened to pretty much anyone who has ever used some kind of leverage, from futures contracts to spreadbets.

So once again we will hear the argument that “you hold gold because it’s insurance” resurface, rather than the argument any investor really wants to hear – which is that we hold gold “because it is going higher”.

The technical picture for gold looks ugly, frankly

On the plus side the March lows at $1,675 have held, and as long as we are above them, at least the end isn’t nigh. But the technical picture is ugly. Just about every moving average is sloping down. If it looks like a bear market and smells like a bear market, it’s a bear market.

You can cite all the arguments you like about fiat money, inflation, debt, suppressed interest rates, money printing, unsustainable spending, misleading government statistics. I know them all. I agree with them all. The gold price “should” be going up. But it isn’t. It’s going down.

The market is wrong. I am right. Well maybe.

The brutal truth is this: over the past year gold and silver have been outshone by pretty much every other asset in the world. A year ago, gold was north of $2,000. Silver was testing $30. Today gold is $1,700. Silver is $23. Find me another asset that has fallen in price with all the printing that is going on – there aren’t many.

I want the price to go up as much as you do. Don’t have a go at the messenger. I’m just reporting what’s written on the ticker.

This might not be 2013 all over again. There isn’t nearly as much excess among gold miners and leveraged speculators as there was back then. I don’t think this bear market will be as bad. But gold has a tricky few months to work through – and it badly needs to hold above $1,675.

If it can, then I will start to feel optimistic again about this most analogue of assets in a digital age. If it can’t, then I fear we head back down to the $1,475 – $1,520 zone.

In the short term I expect us to rally. Let us hope this bounce is not of the (more likely) dead cat variety.

“The main problem that gold has right now, is that the economic recovery is going too well,” says Charlie Morris of Fleet Street Letter fame. He’s right.

Meanwhile, as all this is going on in Western markets, watch the Chinese keep on accumulating...

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is, we think, the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. 

His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government. 

Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art. You can follow him on X @dominicfrisby