Technicals, Chinese holiday behind much of gold price drop

Gold continues to drift lower following Tuesday's crash through the $1,300 an ounce level to its lowest since June, before the Brexit vote lit a fire under the metal.

In early trade on Thursday, December futures trading on the Comex market in New York touched a low of $1,265.10 an ounce, the fifth down day in a row.

Gold's leg down is being blamed on looming interest rate hikes in the US which boosted the dollar (the gold price usually moves into the opposite direction of the currency) and speculation of a scaling back of the European Central Bank's $10 billion a month bond purchase program.

Expectations of a normalization of the interest rate environment and higher returns on government bonds is a negative for gold as the metal provides no yield and investors are only rewarded via price appreciation.

Year to date the metal is still one of the best performing asset classes (only crude oil has performed better) and is close to official bull market status with a 19.4% climb in 2016.

In a new note the World Gold Council says the dip in the price is likely to spur demand and constitutes a good buying opportunity for long-term investors and retail buyers:

Even though central banks may start to normalise monetary policies, such a prolonged period of extraordinary measures has led to a structural shift in asset allocation that will linger much longer.

The almost 3% fall on Tuesday which happened in the space of only a couple of hours of trading has unnerved gold bulls. But says the WGC, the drop was exacerbated by technical factors and the absence of Chinese bargain hunters:

Once the gold price pushed below US$1,310/oz an ounce, representing gold’s 100-day moving average, technical selling increased sharply, exacerbating the fall and triggering stop-losses and further tactical selling.

Meanwhile, Chinese investors, who have historically bought on dips, were celebrating Golden Week national holiday, leaving domestic markets closed.

Technicals, China's Golden Week worsened gold price drop

Source: Bloomberg, World Gold Council

Click here for WGCs' full analysis