Gold Price Plummets on Japan’s Crisis

By Michael Montgomery—Exclusive to Gold Investing News

Gold price fell dramatically, down about $45 per ounce by midday, but regained some of the massive morning losses in the afternoon. Closing price in New York ended the day down $33.10 to $1395.70 per ounce. Tuesday’s sharp drop in gold price is a reflection of the mounting nuclear catastrophe in Japan spooking the markets. Usually, instability in financial markets lay into the hands of gold as investors seek a safe haven to equity markets; this is not the case in the wake of the earthquake and tsunami. The market has been overwhelmed with headlines today, from the economic indicators coming from the Fed, further clashes in the Middle east, and the ongoing nuclear situation in Japan. All precious metals ended lower today as investors are seeking liquidity and moving their positions into cash, and safe haven currencies like the greenback.

Adding to the down side of gold, crude oil prices fell as investors are worried about demand coming from Japan, the world’s third largest oil consumer. As the price of oil is tied in with inflation, the fall of oil prices certainly put downward pressure on gold. The horrific news from Japan overshadowed the Saudi Government sending troops into Bahrain to assist in the civil unrest. How the region will react to these events is unknown, however, supply disruptions in the region could affect oil price dramatically. Stay tuned to this situation.

Economic indicators in the US are generally healthy, and the greenback gained on a basket of currencies as investors liquidated positions into safe heaven currencies. The Federal Open Market Committee released data that showed manufacturing productivity is on the rise in the New York region. Factory output rose at a faster pace than in February, marking the fourth straight monthly increase, the highest since June 2010. US import prices rose 1.4 percent, mainly attributed to the rise in oil price, however, Ben Bernanke stated he doesn’t except a permanent boost to price despite the recent uptick in commodity costs. The general strength of the greenback has increased the level of profit taking in gold as investors scared by the situation in Japan as investors look for liquidity and seek to raise capital.

Safe heaven assets such as gold may fall even further. “Gold is under pressure, and well it should be, for during duress there is always liquidity to be found in the gold market at some clearing price,” stated independent market commentator Dennis Gartman. This is directly related to Japan, because investors are looking to sell whatever they can to raise funds, as Japan Nikkei index fell 14 percent.

Many analysts have worried that gold market was trading on fears out of line with actual inflation numbers. “On a fundamental basis at $1400 per ounce, we don’t see gold necessarily being very well supported in the long term. In other words, [gold price] has gotten ahead of itself based on actual inflation, and it’s really more trading on fear,” stated Oliver Pursche, Co-Portfolio Manager of the GMG Defensive Beta Fund. He added that his firm sees a 12-15 percent risk premium, and that the market could see a pull back to $1,150 per ounce.

Could this pullback be the first sign of a wavering gold market? It is probably too early to tell. With current events on the world markets be in a state of dramatic upheaval the price for gold could go either way. Oil price, inflation, and the health of the world economy will all determine the direction of the price of gold.