Most observers and experts throughout the historic two-day event were wondering what was happening. The catalysts that set off gold's implosion may have emerged a couple years ago. "You had the big move up in 2011 when gold could kind of do no wrong, even times when it should have gone down it probably went up," said Sameer Samana, an advisor at Wells Fargo Advisors. "That had a lot to do with the marginal demand, which was from retail clients, emerging market consumers, central banks -- you just had kind of everybody at the margin adding gold to their portfolios."
Samana said he believed these players jumped into gold as an inflation hedge against the Federal Reserve's monetary stimulus programs. But multiple events in the past month leading up to the collapse can help explain the carnage, coupled with some key technical analysis that allowed for large funds to wipe out tremendous value for the world's oldest currency.
March 18The weekend the Cypriot crisis unfolded prompted bullish gold investors to say that it could lead to a big push higher for prices that had been languishing for months. "I expect a push above $1,600 is certain now, after that I believe the battle begins," David Williams, director at Strategic Gold Corp., predicted on March 17. Gold gained a little more than 0.1% after news spread that Cyprus would be seeking a bailout from the European Central Bank in order to keep its financial sector solvent. The fear trade that day assumed the proposed bailout plan -- which included a requirement to tax all savings accounts of the nation's banks -- would set a precedent and spread to other struggling European nations. Gold's reaction was muted.
The precious metal posted another small gain on March 19, but pulled back on profit taking by the middle of the week. It was a sign that buyers weren't flooding into gold as a safe-haven against uncertainties in Europe caused by Cyprus. The flat action for that week suggested the market was already moving past concerns of the small island nation, despite many predictions that the event would offer solid upside momentum to prices.
April 4The Bank of Japan, led by new Gov. Haruhiko Kuroda, announced it would implement $520 billion in government bond purchases per year. The dramatic move meant that the amount of quantitative easing would equate to about 10% of the nation's gross domestic product. Kuroda's decision showed the BOJ's commitment to hit a 2% inflation target in a couple of years and shift Japan from a more than two-decade period of deflation.
But the inflation-supporting measures out of Japan failed to boost gold, which many investors consider as an asset hedge against inflation pressures. Gold's headline -- the same day the BOJ implemented its historic monetary stimulus program -- was that it had posted a 10-month low. "Japan had really been the trigger," RJO Futures' Streible said. Streible said that when the BOJ announced its massive quantitative easing package, large institutions there had to rebalance and funds sold their gold positions and their yen positions to hold capital in order to hang on to exploding Japanese government bonds. April 10 A couple of events on April 10 hit the yellow metal. First, Goldman Sachs ( GS) lowered its gold price forecast and recommended investors to short COMEX gold positions. Second, the Fed released minutes of its March policy-making meeting earlier than expected after the central bank learned someone had inadvertently sent the information a day early to 154 individuals from various entities, including bank lobbying firms, Congressional staffers, and others. The minutes revealed a growing number of Federal Open Market Committee members who were embracing the idea to scale back the central bank's stimulus programs. Such a move likely would take a bite out of gold prices as the yellow metal's perceived status as a hedge against inflation would fade if the Fed slowed its expansion of the monetary base. The Fed news coupled with Goldman's short recommendation triggered a 1.8% selloff, normally considered a huge loss. Gold tacked on a slight gain for Thursday, April 11. April 12 Electronic trading of COMEX gold, by 5 a.m. ET on Friday, April 12, had already seen about a 2% selloff since the prior day's settlement. The movement sparked concern among traders that the market was destabilizing. A European Commission assessment had emerged that required Cyprus to sell about $523 million in excess gold reserves in order to supplement its bailout program. But the yellow metal was still hovering above the level of $1,525 an ounce -- a technical number that traders widely perceived as a critical level of support -- which suggested that the worst of Friday's session had finished before most people were arriving at their offices. "The average broker gets on the phone and starts calling customers: 'Hey, market's down, are you sending in more money, do you want to buy more, or what are your instructions?'" said George Gero, precious metals strategist at RBC Capital Markets. "Most customers make price decisions; they don't like uncertainty, so with the price decisions