Gold prices tumbled 9 percent on Monday, the sharpest drop in 30 years, heightening fears that investors’ faith in the safe haven has been shattered.
The steep fall in gold, following a slump on Friday, led a broader sell-off in commodities and stock markets, with the Standard & Poor’s 500-stock index declining 2.3 percent â€" its sharpest one-day decline since early November. Crude oil prices fell to under $90 a barrel, and copper fell to a 17-month low.
The catalyst was disappointment over Chinese growth, which has been a bright spot in a global economy marred by uneven recoveries and Europe’s persistent debt problems. A report on Monday showed that Chinese economy unexpectedly slowed to an annual pace of 7.7 percent in the first months of the year, from 7.9 percent at the end of 2012, suggesting that China’s demand for industrial materials would soften.
Weak regional manufacturing data in the United States also weighed on the United States stock market as did the explosions in Boston later in the day.
Still it was gold that took the market spotlight on Monday.
The price of the metal has been undergoing extraordinary reversal from a decade-long rally. Since reaching a high of $1,888 an ounce in August 2011, gold has been on a downward slope. The decline picked up pace on Friday, when gold fell 4 percent, officially taking gold into a bear market, which is defined as a 20 percent drop from its recent high.
The damage grew much worse on Monday, when the price of an ounce of gold dropped 9.35 percent, or $140.40, to $1,360.60 for the April contract â€" the sharpest such one-day decline since February 1983. Last week, Goldman Sachs analysts advised clients to bet against gold.
“We’ve traded gold for nearly four decades and we’ve never … ever… EVER… seen anything like what we’ve witnessed in the past two trading sessions,†Dennis Gartman, a closely followed gold investor, wrote to clients on Monday.
The shift in gold’s fortunes presents a moment of reckoning for many so-called gold bugs, who had expected their financial lodestar to continue moving up in response to the Federal Reserve’s effort to stimulate the economy through bond-buying programs.
The assumption among gold bugs was that the flood of new money would cause inflation, making hard assets like gold more attractive. So far, though, there have been few signs of inflation taking root even as central banks in Japan and Europe have begun their own aggressive bond-buying programs.
“Gold has had all the reason in the world to be moving higher â€" but it hasn’t been able to do it,†said Matt Zeman, a metals trader at Kingsview Financial. “The situation has not deteriorated the way that a lot of people thought it could.â€
The recent drop in gold prices has been attributed partly to signals from powerful members of the Fed that the central bank may begin to wind down its bond-buying programs. But the list of reasons to sell gold grows longer by the day. European politicians have indicated that Cyprus may need to sell off some of its gold holdings to pay for its bank bailout, which could lead other countries to do the same.
The market decline, like the decade-long run up has also been blamed on the new financial instruments that have made buying gold easier for a wide array of investors.
The most prominent products are gold exchange-traded funds, which can be traded on stock exchanges, and which together hold as much gold as all but a few of the world’s largest central banks.
Hedge funds have used gold E.T.F.’s to gain exposure to the precious metal, but have been selling those E.T.F.’s off en masse in recent weeks. The largest such E.T.F., with the ticker symbol GLD, saw its most active day ever on Monday.
“The exits are only so wide and there are too many people trying to leave all the sudden,†said Bart Melek, a commodity strategist at TD Securities.
Many gold analysts have said that the demand for physical gold is stronger than the demand for financial products linked to gold, such as E.T.F.’s and futures contracts. But this has not been enough to prop up the market.
On Monday, the most obvious catalyst for the carnage was the fthe disappointment Chinese economic data that led to talk that China will no longer need the same physical resources to expand.
In the commodities world, this did not just hurt gold. Silver dropped over 12 percent, platinum 5.6 percent and the benchmark oil contract was down 3.9 percent. Stock indexes fell 1.5 percent in Japan and 0.6 percent in England.
The Standard & Poor’s 500-stock index dropped 2.3 percent, or 36.49 points, to 1,552.36 on Monday. The Dow Jones industrial average closed down 1.8 percent, or 265.86 points, at 14,599.20. The Nasdaq composite index fell 2.4 percent, or 78.46 points, to 3,216.49.
In the bond market, interest rates fell as investors shifted their money to less risky assets. The price of the Treasury’s 10-year note rose 9/32, to 102-26/32, while its yield dropped to 1.69 percent, from 1.72 percent late Friday.
