Why Gold Prices Took a Hit Last Week

Gold prices hit their lowest levels in five years last week, trading below $1,100. What was the real driving factor behind the price's decrease?

Without a doubt, many will use recent developments in the global economy as an excuse. The Grexit no longer looks like a certainty thanks to a bailout of questionable sustainability. China's gold cravings seem to be lesser-than-usual. There's also the looming threat of an interest rate hike and a subsequent strengthening of the dollar.

Yet, upon further examination, none of these seem to be the guilty party that sent gold plummeting. China's gold demand is strong despite day-to-day deviations, and the U.S. rate hike isn't nearly as 'around the corner' as many believe. Most importantly, perhaps, gold is fundamentally different from other commodities, having different demand drivers.

Instead, Mining.com's Frik Els points out two recent events that he refers to as a 'one-two punch that floored gold price'; one from the U.S. and one from China.

Els argues that the U.S.'s part in gold's fall came via speculators in the Commodity Futures Trading Commission slashing their net-long positions, with managed-money accounts significantly reducing their exposure to gold futures. Many of these sales came as a result of uncertainty regarding the direction that the gold market is heading in.

Similarly, Els notes that China played its part by performing a massive gold sale worth $2 billion in just a matter of minutes. Due to its size, the Monday Shanghai Gold Exchange sale of 4.7 tons immediately caused gold to drop by 4.3 percent – gold sales usually average no more than 96 kilograms a minute on the SGE.

Els adds that these seemed an "almost concerted cross-continental effort to push price through support levels that the metal has bounced off numerous times before." Yet despite these drawbacks, gold still managed to bounce back to $1,100 almost immediately.

While such falls in the price of gold are universally viewed as negative, many buyers still see them as little more than a buying opportunity. As gold fell by over 3 percent in both India and Turkey, consumer interest in these markets grew – the metal's low correlation with other assets makes it ideal as a safety-net investment to diversify one's portfolio.

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