August 26, 2011 5:44 pm

Wild week as gold touches record before plunging

Gold prices closed a rollercoaster week down 4 per cent but off the lows triggered by a massive round of profit-taking on Wednesday and Thursday as the market turned positive after a speech by Ben Bernanke.

The US Federal Reserve chairman said on Friday that the central bank was “prepared to employ its tools as appropriate to promote a stronger recovery”, dropping a broad hint that the US central bank would soon do more to support an ailing economy.

The speech capped a wild week for gold. After touching an all-time nominal high of $1,911.46 per troy ounce late on Monday, gold fell over the next tree days sharply.

At some point, it lost $200, its sharpest ever three-day absolute drop and the biggest drop in percentage terms for 25 years.

Spot bullion in London rose to a session high of $1,794 per troy ounce on Friday after Bernanke’s speech, up 1.3 per cent on the day and nearly 5.5 per cent up from the $1,702 per ounce low set the previous day.

“The general consensus is that gold prices will be higher by year-end, but people aren’t prepared to buy yet, for fear of catching a falling knife,” said Edel Tully, precious metal strategist at UBS in London.

She added, nonetheless, that physical buyers were showing signs of arriving to the market, although not on big numbers.

The drop in prices has, however, showed that gold is not the risk-free asset that many investors believe it is.

“We now know that gold has an Achilles heel and the slump this week echoes the over 30 per cent crash in the silver price seen in early May,” said Nick Moore, metals analyst at Royal Bank of Scotland in London.

Silver prices hit a 30-year high of nearly $50 per ounce in late April only to tank nearly 35 per cent over a two-week space as investors rushed to take profits.

On Friday, silver traded at $41.04 per ounce, down nearly 5 per cent on the week.

Analysts said that the price swings of the week on gold were partly the result of profit-taking after gold strong rally earlier on the month.

But they said the sharp drop in prices came after a leading US metals exchange announced it would demand larger good-faith deposits to own gold futures.

Late on Wednesday, CME Group, the operator of New York’s Comex exchange, said it would increase gold margin requirements by 27 per cent.

This followed a 22 per cent rise two weeks ago. The increase raised the prospect that some gold traders using borrowed money would have to bail out.

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