The decline was the largest two-day fall since the 1980s and more surprisingly happened despite no movement in FX markets or in bonds. This decline was all about gold and nothing to do with movments in other markets.
The chart on the right shows the decline in the context of the last 10 years or so against the US trade weighted index. What is interesting is that the drop in the gold price when taking into account the level of the US dollar has taken us back to where we were in 2011.
The big question for investors is whether this decline makes sense in the context of new information. Certainly the justification for the decline based on mostly irrelevant news flow just before the drop was very weak. But since the start of the year perhaps a case can be built for the gains seen following the US debt ceiling debate and intensification of the Euro crisis back in late 2011 can be made.
That said, we haven't seen this really affecting other key varibles. The US dollar has done next to nothing, while bond markets remain unmoved. I also think there are still big risks surrounding the Euro area given the absence of growth, while the tapering of QE3 hardly seems to be a game changer in my view.
So while many remain cautious about further falls in gold, it really just seems because its fallen alot already. For my money, its more likely to get back to where it was rather than fall further out of bed.
