Updated from 12:10 p.m. EDTIt took until noon for the gold market to wake up Thursday, after the bonanza Ben Bernanke party on Wednesday. But when the market did awaken, traders got a hangover, with August gold prices hitting the skids, losing $10.30 to close at $632.50 on the Comex division of the New York Mercantile Exchange, or Nymex. The precipitating factor, which came after a morning of ultra low volume of about 5,400 contracts, were some careless words by the Federal Reserve chairman during his House testimony. Apparently traders were spooked by the fact that Bernanke says the economy is "in balance," according to Jon Nadler, an analyst with Montreal-based gold bullion dealer Kitco. Such an economy could handle more rate hikes, which are presumably bullish for the dollar and bearish for gold, Nadler explains. (That said, odds of another Fed rate hike fell to 54% in the aftermath of the 2 p.m. EDT release of the minutes of the June 28-29 FOMC meeting; the odds were above 90% Wednesday prior to the start of Bernanke's testimony, according to Miller Tabak.) Gold's reaction is a reflection of how the market is looking to grasp onto anything it can right now, with "usually uncorrelated asset classes, such as equities and gold, moving in tandem," Nadler says. He adds that investors seem to be trying to decide on which asset classes to allocate funds, and that combined with volume of roughly half the level of Wednesday's session, the market was apt to be choppy. Earlier in the day some gold bulls were still revved up from the previous day's Bernanke-fueled gold spike and thought the prospect of an end to tightening meant good news for gold miners. "This could be the signal to re-enter commodities," says Randy Diamond, an analyst at New York-based Miller Tabak, in a morning research note distributed before the opening bell. "Whether the Fed raises one or two times more, the rate-hike cycle is indisputably near a climax." He explains that the solid supply-and-demand fundamentals combined with a likely continued weak U.S. dollar should prove beneficial for precious-metals miners such as Barrick Gold ( ABX), Newmont Mining ( NEM), Silver Standard Resources ( SSRI), Pan American Silver ( PAAS) and Goldcorp ( GG). (Those stocks were all down Wednesday afternoon, by between 2.9% and 4.2% in recent trading.) With interest rates now seen as less likely to rise, international investors may dump dollars in favor of other currencies as they seek higher-yielding currencies. A weak dollar usually results in elevated gold and oil prices. In addition to likely improved revenue from increased bullion prices, the higher costs of energy should keep marginal mines from developing more production; this again is bullish for gold, as additional supply is restricted. In the futures markets, the next week will see commodity funds selling off their long positions in near-term, or August, gold contracts in favor of ones for December delivery. "The roll is happening," says Jeff Christian, managing director at CPM Group, a New York-based consulting company. "By late next week you should see August open interest down under 1 million." He notes that open interest in the August contract has dipped from 17.4 million ounces on July 10 to 14.8 million currently. For December the figure is currently 8.6 million ounces, and this will likely rise in coming days.
The result of the "roll," says Christian, is that there will be a depressing effect on spot prices and a likely lifting effect on December contract prices, which were trading at $646 an ounce, down $9.70. He also notes that the market is very nervous with traders looking for "equilibrium" and for news from which to take direction, and when combined with the summer vacation season, this results in low volumes. Shares of the bullion-exchange-traded funds iShares Comex Gold Trust ( IAU) and streetTRACKS Gold Shares ( GLD) were trading down. Paul Tustain, director of London-based Bullionvault.com, notes that retail interest in buying bullion bars remains strong. His company, which was formed only 14 months ago, allows investors to buy and sell bullion via the Web. He adds that trading on the Web site is double the level it was three months ago, with about $40 million of gold held in custody in banks located in London, New York and Zurich.