Gold futures plunged big time at around 9:30 p.m. E.T. on Sunday July 19th. More than $2.0 billion worth of gold futures were sold off in a couple of minutes. Spot gold prices dropped to as low as $1,072.01—the lowest level since March 2010.
The massive sell-off in gold futures triggered similar effects for silver and platinum. During the same period that gold crashed, silver plunged 2.3%, while platinum dropped as much as 3.1%.
As a result, shares of precious metal mining companies tumbled as well. Barrick Gold Corporation’s (NYSE/ABX) stock price tumbled 8.8% on Monday morning to $8.02. Newmont Mining Corporation (NYSE/NEM) dropped 9.5% to $18.72. Shares of Tahoe Resources Inc. (NSYE/TAHO) tanked 9.0% to $8.97.
The sharp drop in gold futures could have something to do with China. On the Shanghai Gold Exchange, more than five tons of gold were sold during the first few minutes. This was highly abnormal because the average daily volume was around 25 tons. It also happened during the same period when gold futures plunged.
The tumble in gold prices could also come from the Federal Reserve, which is expected to raise interest rates sometime later this year. Since gold does not yield interest and carries storage costs, higher interest rates on the greenback would make gold less attractive to investors.
More Crashing Unlikely to Come
Last Friday, China announced its official gold reserves for the first time since April 2009. The new data from the People’s Bank of China suggests that China now has 53.3 million ounces (1658 tons)—a whopping 57% increase!
Analysts think that the announcement was to help China push its currency into the International Monetary Fund (IMF) basket of reserve currencies. Having more gold gives China’s central bank and the yuan more credibility.
The key takeaway from China’s announcement is that it could be just the beginning. According to Robin Bhar, analyst at Societe Generale, China could increase its gold reserves to more than 5,000 tons. Another analyst, Joni Teves at UBS Group (NYSE/UBS), said that China could potentially buy more gold in the future, which could limit the downward pressure on gold prices. (Source: Bloomberg, July 19, 2015.)
It was a surprise that gold prices did not go up amidst Greece’s problem and China’s record stock market crash. My colleague Moe Zulfiqar has previously suggested that there might be more evidence for gold price manipulation.
This was not the first time that gold futures were being sold off. Last week, more than $1.0 billion worth of gold futures were dumped into the market, causing the price of the shiny metal to drop.
However, investors shouldn’t turn bearish on gold. Why? Because of short-selling.
If all the selling of gold on the market comes from people that own gold, then it’s fine. But with such high volume and abruptness, it looks more like speculative shorting. Short-sellers will eventually have to cover their positions, meaning they are going to buy back whatever they sold. This implies that gold prices are due for a big squeeze sometime in the future.