Gold fell for the seventh straight day yesterday and is now down nearly 9% from its recent high just above $1,000/oz – see chart below).
Gold had become overbought in the short term and had risen over 24% in just over a month ($806/oz on January 14th to over $1,000/oz on February 20th ). Thus, this correction was necessary and healthy and even after this correction gold remains up 4% in USD (and much more in GBP +7.6% and EUR +15.6%) in 2009.
The gold bears are calling for lower prices due to a decline in demand from India and an increase in gold scrap (consumers selling jewellery). They also believe that there may be an easing of investment demand for bullion and ETFs. ETF demand has certainly subsided from the exponential growth seen in recent weeks. However, given the global financial and economic system is effectively ruptured, wealth preservation and risk aversion is likely to remain evident in the coming months and indeed years.
This may lead to a change in investor behaviour whereby gold again becomes an integral core holding in most investment portfolios and in pensions. This would see investment demand remain robust and remain at higher levels for the foreseeable future. Even if investment demand does fall from record levels seen in recent weeks, this is likely to be compensated for by increasing demand from central banks particularly China and OPEC nations.