GOLD FALLS BELOW $4,000 AN OUNCE AS "FROTH" TAKEN OUT OF THE MARKET / THE FINANCIAL TIMES

Gold falls below $4,000 an ounce as ‘froth’ taken out of market

Bullion has slumped 9% from recent peak in move welcomed as ‘healthy correction’

Leslie Hook in Kyoto

A worker pours gold precipitate powder into a large crucible at an industrial foundry. The precious metal’s rise this year has been driven by demand from investors who see it as a hedge against geopolitical uncertainty, high government debt levels and US dollar decline © Andrey Rudakov/Bloomberg

The price of gold broke below $4,000 a troy ounce on Monday, as some of the “froth” gets taken out of what industry executives said had become an unsustainable rally.

Bullion fell to $3,986 an ounce during Monday trading after surging 27 per cent in just seven weeks to a high of $4,381 on October 20, in what some in the sector said was “speculative” positioning by investors.

The price has fallen 9 per cent in a week from its recent high.

Industry executives said they expected prices to enter a deeper correction in coming weeks, as the decline was welcomed as a “healthy correction” to a blistering rally that had become unsustainable.

As bullion traders gather this week at the sector’s biggest annual conference, the ebullient mood of participants has been punctuated by surprising warnings that prices may have further to fall before they recover.

“I think a lot of people in the industry would actually welcome a deeper correction than we have at the moment,” said John Reade, market strategist at the World Gold Council, which represents gold miners, 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 the lunatics ever thought gold would get this high.”

Gold’s rise this year has been driven by demand from investors who see it as a hedge against geopolitical uncertainty, high government debt levels and US dollar decline. 

Central banks have also been buying gold as they diversify assets away from the dollar, though these purchases have slowed in recent months, according to IMF data.

Bullion rose more than two-thirds in price this year to its recent peak, crossing the key $3,000 threshold in March and then punching through $4,000 in early October.

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

“We are definitely in a correction, and corrections don’t play out in just a few days,” said Nicholas Frappell, global head of institutional markets for Australia’s ABC Refinery. 

“I would not be surprised to see gold go to $3,700 before retesting new highs.”

“The prices normally don’t keep going up,” said Paul Fisher, outgoing chair of the LBMA, adding that the recent surge was due to “froth” in the market.

“That’s why last week’s [move] is quite important. 

It just knocks that froth out of the market,” he said. 

“You can get a bit of a correction because that clears out the speculative positions, then it is ready to go again. 

The price could go higher from here.”

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

However, even the bulls are nervous about a near-term slump.

“A few people I’ve spoken to think $3,500 would be healthy for the gold market because it still would be a ridiculously high price,” said Reade at the World Gold Council, which sponsors a gold-backed exchange traded fund. 

“From my perspective, I think that is certainly possible.”  

One question facing the market is how sustainable the recent interest from retail investors — who have queued around the block in Australia and Japan in recent weeks to buy small gold bars and coins — will prove to be.

Another unknown is whether central banks — which bought record levels of gold in the past three years — will slow down their purchases due to high prices. 

Some smaller central banks are even having to sell gold to maintain their allocation ratio, because high gold prices have pushed up the proportion of their assets accounted for by bullion.

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

“We’ve seen the volumes go up; it’s investors all over the world, on a mainstream level, wanting to have some exposure to gold,” she said. 

“To me it doesn’t feel like a moment, it feels like a new chapter.”