Gold prices sank to a five-year low today, following a speculative selloff in China. The yellow metal rebounded soon after, but analysts note that gold appears unlikely to maintain prices above $1,100.
Gold futures for August delivery on the Comex division of the New York Mercantile Exchange were down 1.45 percent to $1,114.60 per troy ounce as of 10:26 BST. The future dropped to $1,087.4 earlier in the session, logging a five-year low. The contract has lost nearly eight percent over the past month, closing in the red for the past six sessions, the metal’s longest losing streak since November.
Contracts worth five tons of the precious metal changed hands within two minutes following opening bell in Shanghai. More than three millions lots were traded, as compared with a daily average of less than 30,000 in July, according to Reuters data.
"It was down to speculation here, someone taking advantage of the low liquidity environment," Victor Thianpiriya, commodity strategist at ANZ, said. "It clearly wasn't driven by fundamentals, because the U.S. dollar didn't move at that time."
The selloff was probably caused by a string of bearish news recently, which merited an adjustment of market projections and stop losses, analysts argued.
China reported on Friday that state gold reserves were being filled at a dramatically lower rate than analysts had anticipated, sapping traditionally strong support for the precious metal.
Meanwhile, risk aversion due to the Greek crisis appears to be abating now that a worst-case scenario seems to have been prevented and aid for the cash-strapped country has been agreed.
Increased political and economic security tends to increase investor appetite for risky assets, such as equities, which drains demand away from precious metals, pressuring prices.
The strengthening US dollar also lessens the investment appeal of gold, and the greenback has indeed been climbing recently. The US Dollar index has added about four percent over the past month, amid further indications that borrowing costs will increase before the end of the year.
"There are no clear signs (or reason) to buy [gold],” said Evan Lucas, a market strategist at trading firm IG, adding that he expects the metal to trade for $1,000 per ounce by year’s end. “It is an inert metal that is a store of value yet inflation is heading nowhere and investment in the US dollar and bonds is clearly more appealing."