Gold Continues Decline

Co-ordinating themselves somewhat with the Federal Reserve, the Bank of England's Monetary Policy Committee left the BoE rate unchanged at 0.5%. Its quantitative-easing program was left on hold. The European Central Bank also held the course, leaving its key interest rate unchanged at 1%. Mainland China's May exports have come in with an brow-raising increase of 48.5% in May as compared with exports a year ago, and property prices are still jumping up even though sales are going down. There's worry of a slowdown, prompted by People's Bank of China tightening.

As the pessimism earlier in the week fades, gold continued to slump. Before midnight ET, the metal stayed in a range bordered by $1,233 on the upside and $1,230 on the downside. Shortly afterwards, though, it went on a slow but extended decline that took its price all the way down to $1,219.00 before a recovery rally set in. Reversing around 5:30, the gold market evidently took some heart from the Bank of England decision. As of 8:08 AM ET, the spot price was $1,223.90 for a drop of $9.20 on the day. The Kitco Gold Index attributed -$14.15 to predominant selling and +$4.95 to weakness in the greenback.

The U.S. Dollar Index, after continuing to rally in the evening, took a tumble just before midnight. In two hours starting at 11 PM, the Index dropped from about 87.9 to about 87.5. After mounting a recovery rally that took it up to 87.7, it fell further to as low as 87.32 before pulling back up as of 5:30. The rebound took it above 87.5, and left it hovering between that level and 87.6. As of 8:14, the Index was at 87.52.

A Wall Street Journal report pegs gold's drop as caused by easing of worries about the global economy leading to profit-taking.

"We've seen such a huge move that traders are just booking profits," said Larry Young, senior portfolio manager with Covenant Trading in Chicago.

Because much of gold's run-up recently has been exacerbated by speculators, that leaves the market more vulnerable to quick pullbacks, Mr. Young said. He said market participants remain bullish on the metal.

The morning Bloomberg report, as webbed by Business Week, also points to easing of fears and profit-taking; the former was reflected in the rise of the Euro.

“The resulting increase in risk appetite has led to further pockets of profit-taking in gold,” said James Moore, an analyst at TheBullionDesk.com in London. Gold is likely “to move more in line with the dollar as a result of risk trades, while dips will continue to be viewed favourably by investment bargain hunters.”...

“It’s likely the safe haven trade will not be a strong feature” with stronger equities and better-than-expected economic data, Edel Tully, an analyst at UBS AG in London, said in a note. Physical demand “is now overshadowed by increased scrap supply out of Asia.”

Also mentioned is mainland China’s State Administration of Foreign Exchange panning gold as an asset class, saying that price volatility and high transaction costs limit its use.

A Reuters report, in addition to the standard causes, highlighted that thumbs-down on gold:

Gold eased below $1,225 an ounce in Europe on Thursday as stock markets rose and the euro climbed against the dollar, reflecting sharper appetite for assets seen as higher risk, at bullion's expense.

The precious metal briefly extended losses after China's State Administration of Foreign Exchange (SAFE) said in an annual report that the gold market is too small, illiquid and volatile to be suitable for asset allocation.

Also mentioned in the report was a well-received auction of Spanish sovereign debt, allaying fears that the Eurocrisis is still malignant. Ms. Tully was noted as saying that demand for bars and coins has shrunk back to more normal levels recently.

The weekly jobless-claims number for the U.S. economy fell slightly, to 456,000; it was well above the expectations for a drop to 445,000. Continuing claims dropped unaccountably to a level not seen since the end of 2008. Given the recent strength of the greenback, a widening of the U.S. trade deficit wasn't that much of a surprise: April's figure of $40.3 billion was actually a little better than what was expected. Exports fell more than imports. In a post-decision press conference, European Central Bank president Jean-Claude Trichet said he sees slow growth and dormant inflation ahead for the EU. He praised recent efforts by high-deficit national governments to get those deficits under control. The announcement of this data coincided with a halt in gold's recovery rally, as the metal fluctuated between $1,225 and $1,227 with the opening of regular trading. As of 8:49, the spot price was $1,226.00 for a loss of $7.10 on the day. The Kitco Gold Index assigned -$11.30's worth of change to predominant selling and +$4.20's worth to greenback weakness. The U.S. Dollar Index slumped to just above 87.4, but its pullback ended right after the release of the above data. Turning upwards to 87.6, the Index later settled back to around the 87.5 level. As of 8:54, it was at 87.53.

In the absence of any new driver, gold is continuing to slump. In a way, it's not that surprising because the metal is well above bargain-hunter targets. We may be seeing, in attenuated form, the influence of post-May price weakness.