It’s been a tumultuous month or two for gold – and the world’s financial media has taken note. The yellow metal was headline news as its price moved swiftly upward in late August and early September to reach a new all-time high of $1,923.70 on Sept. 6 in New York intraday trading. Since then, the decline has been even swifter with the price falling at one point on Monday, Sept. 26, by more than $120 an ounce to $1,580 in Asian trading.

The magnitude of gold’s decline – about $344 an ounce from its September historic peak to its recent low point – seems stunning in absolute value terms. But, in percentage terms, it has lost “only” 18%, which historically speaking is not so unusual. At the time of the Lehman Brothers bankruptcy in 2008, gold fell more than 20% and, in the 1970s, gold corrected several times by 15% to 20% and once by some 30% in the midst of a great bull market that took the metal from one historic high to the next.

Gold’s latest rout has been attributed by pundits and headline writers to a number of factors:

• Some claim gold lost ground so quick as investors, seeking liquidity and a safe haven, rushed into US dollars as investors sought liquidity and a safe haven. And we all know that gold should move inversely with the greenback, right?
• Others say the metal’s price dropped as investors liquidated gold to cover losses and meet margin calls in world stock and bond markets.
• Meanwhile, the uncertainty and political stalemate in Europe, as Greece moved closer and closer to declaring bankruptcy, received some of the blame for the sharp drop in world stock markets and, by extension, gold.
• Similarly, a number of analysts pointed to the failure of Congress and the administration to deal effectively with America’s Federal deficit and debt crisis . . . or to the outcome of the last Federal Reserve policy-setting meeting and the Fed’s expressed concern that the economy is at risk.

I think these are mostly lame and somewhat timeworn excuses, the sort of analytical thinking that we hear whenever gold suffers anything from a minor one-day setback to a sharp price correction lasting weeks or months.

In fact, there was no widespread selling of gold, physical gold that is, by investors around the world — just the opposite. Private investors in Europe, North America, India, China, and elsewhere were net buyers of gold over the past several weeks of gold-price weakness.

We have had almost daily reports from our well-placed gold-market friends in key world markets that demand for small bars and coins has remained fairly firm as buyers were attracted by lower price levels. Confirming a persistence of demand and the tightness of the gold market has been the high price premium for both large and small bars in the key Asian centers.

Driving Asian investment demand – in India, China, and elsewhere – has been the continuing rise in household incomes in tandem with worrisome inflation – and this pro-gold combination is unlikely to change in the foreseeable future.

Meanwhile, gold exchange-traded funds, a popular gold investment medium for some Western investors, both retail and institutional, have lost only about half a million ounces in the past few weeks, not much compared to the buying of physical gold and not as much as some feared or predicted in view of the “bad” press gold has gotten lately.

In addition, and very importantly, it is likely that central banks in the aggregate were also significant net buyers of gold in recent weeks, especially each time the price took a tumble. I believe that a few central banks – central banks that have been fairly regular buyers including Russia and China (which does not report or publicize its purchases) have stepped up their purchases in reaction to the lower, more attractive, price levels now prevailing.

So, who then, is responsible for gold’s swift loss? It hasn’t been retail and institutional investors selling physical gold in world markets. It hasn’t been central banks selling their official reserve holdings.

Now – rather than any dramatic reversal in world physical markets – it looks like the precipitous price decline in the last few weeks can be blamed entirely on institutional speculators (including some prominent hedge funds, commodity funds, and the trading desks of the big Wall Street banks) who, as a group, sold or reversed their previous “long” bets that had contributed to gold’s swift and steep ascent recently on the way up.

These institutional speculators trade in such large and leveraged volumes in futures, over-the-counter, and other derivative markets, utilizing momentum and other “black box” trading algorithms, that their collective actions can, for a time, simply overwhelm the actual ebb and flow of physical gold in world markets.

However, what governs the price of gold over the long term are the market’s real-world supply and demand fundamentals – and these have been decidedly bullish and are becoming even more so.

Nothing that has occurred in the past few days in any way diminishes my long-term enthusiasm about gold-price prospects.

The same bullish gold-market fundamentals, macroeconomic trends, and other recent-year institutional and structural changes in the gold market per se (such as the introduction and growth of gold exchange-traded funds or the legalization of private gold investment in China) that we have been discussing for many years remain firmly in place and promise significantly higher gold prices over the next five years or longer.

Indeed, US and European economic prospects continue to deteriorate, suggesting we will see still more desperate monetary stimulus from the Fed and the European Central Bank (the ECB) before the end of this year.

Here in the United States, the Fed will be facing continued signs of renewed recession or recession-like business and employment conditions and their policy response is likely to be a third round of quantitative easing (QE3) or other program of monetary stimulus, possibly announced in early November following the Fed’s FOMC monetary policy setting meeting.

Across the Atlantic, the ECB will still be struggling to prevent the approaching Greek sovereign debt default and the insolvency of some European banks holding Greek sovereign debt. Some fear this would be a catastrophe far worse than the Lehman Brothers bankruptcy – with dire consequences for the world economy.

Importantly, to the gold-price outlook, today’s buyers, both private investors and central banks, are likely to be long-term holders. Much of this gold, once bought, is unlikely to be resold any time soon even at much higher price levels. For central banks, the holding period will be measured in decades if not longer. This promises less liquidity, more volatility, and much higher prices in the years ahead.

Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital, has been a precious metals economist for over 25 years.

BAGHDAD – A dramatic rise in gold prices is shattering the dreams of marriage-hopefuls in the Arab world, where buying the precious metal is a long-standing tradition.

“I was shocked and bitter,” Mustafa Kadhim, a 23-year-old Iraqi who seeks to buy jewellery for his fiancée Sura, told Agence France-Presse (AFP).

“I am really worried about the prices − everything is getting more expensive, including gold.”

But “buying gold is a tradition, everyone should do it,” said Kadhim.

Gold prices have been skyrocketing in recent months.

The prices of the precious metals reached their peak last month to $1,921.15 per ounce, a 35 percent increase since the beginning of the year.

Though the prices have fallen in the past few days, they remain high enough to generate frustration in a region where buying gold to mark a marriage is a long-standing tradition.

“We have a saying that we believe: beauty and savings,” said Umm Salam, whose dentist son is to be married in six months.

“Gold makes the bride beautiful, and it is a source of savings if there is a crisis in the future,” said the mother, who son paid six million Iraqi dinars ($5,100) to buy 85 grams of gold for his fiancée.

Iraqis are not the only ones frustrated with the rising gold prices.

The Middle East is one of the biggest consumers of gold in the world, with a particularly high proportion of the precious metal being bought as jewellery, according to the World Gold Council.

“I have been planning to get married for a few years, but because of high prices, particularly gold, I only managed to get engaged last month,” Alaa John, a Jordanian graphic designer, 30, said.

Frustration

The high prices are also frustrating gold sellers.

“The wedding season this summer has been disastrous,” Marwan Ibrahim, a Lebanese jeweler, told AFP.

“There is close to no market for the items considered traditional wedding gifts.”

According to Ibrahim, sales in the traditional gold markets in Lebanon’s second-largest city of Tripoli in the north have dropped 90 percent from 2007, and have halved compared to last summer.

“We used to sell 24 carat rings of around 100 grams like hotcakes,” Ibrahim recalled.

“Today that same price would buy you 10 grams.

“So people are going for the cheapest possible option − fewer carats and lighter rings − of course.”

In Saudi Arabia, one of the region’s richest countries, demand for wedding jewellery has dropped by 60 percent as prices have risen, said Ali Baterfi, who owns the oldest such shop in the Red Sea city of Jeddah.

Alternatives

Trying to complete their marriage, Arabs are dropping the long-standing tradition for more creative ways to offer gold.

“Customs, habits and traditions control us in Jordan,” John, the Jordanian groom-to-be, said.

To complete their marriage, John and his fiancée eventually agreed to buy “only” $2,500 worth of 21-carat gold jewellery.

“Gold is key to getting married,” he said.

In Oman, rising prices have forced families to drop another tradition that only the groom’s family pays for the gold.

“The parents of the bride must now put their hands in their pockets, with the rising price of gold,” said Khamis al-Salehi, who took his family to the gold market in Suwaiq, a town 150 kilometers (90 miles) west of Muscat, to prepare for his daughter’s wedding.

Borrowing used jewellery from relatives and wearing either gold-plated jewellery was also a resort for those who cannot afford to buy.

Husband of Algerian Malika, who works in a state company, offered her the jewellery of her sister-in-law which was returned after the wedding.

Other couples decided to save money abandoning buying gold at all.

Hala, a 26-year-old Syrian whose purchasing power has shrunk as her country is rocked by anti-government protests, has decided to buy a silver wedding ring.

“It is cheaper, and it shines like white gold,” Hala said.

Deema Tabet, a Lebanese schoolteacher and her fiancé also gave up buying jewellery, and instead invested in an apartment.

“We kept putting off our engagement because everything was so expensive, including the rings,” said the 26-year-old.

“We decided not to listen to our families.

“I’m now wearing a nice faux bijoux that cost us $30 instead of $600 and we’re getting married next summer.”

Jewellers were also forced to adapt to the drop in demand.

“Jewellers have halved the weight of their items while keeping the style,” Ibrahim, the Lebanese jeweler, said.

NEW YORK (TheStreet ) — Gold prices climbed higher Monday as investors bought gold at a “discount” on the first day of the fourth quarter.

P/Gold for December delivery closed up $35.40 at $1,657.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,667 and as low as $1,620 an ounce, while the spot gold price was adding $22, according to Kitco’s gold index.

Silver prices added 71 cents to settle at $30.79 an ounce while the U.S. dollar index was adding 0.72% at $79.36.

Big moves in gold are “behind us,” says Ross Norman, CEO of Sharps Pixley, who says that dollar strength could temper gains “but there are still some very serious … problems in the U.S. that need to be resolved.” Norman thinks the dollar is near highs for the short term which will push “gold to $1,700 levels.”

Although no expert is forecasting a big run to the $2,000 level, many are citing strong physical demand and modest safe-haven buying as pushing prices higher.

“The thing to really bear in mind is what is happening to the average price,” says Paul Walker, global head of precious metals at GFMS, a research consultancy owned by Thomson Reuters, “not a temporary spike to $2,000 then it falls back sharply … but the important thing … is [seeing a] rising average price.”

The fall is typically a strong buying season for India and China with many festivals and weddings giving consumers lots of reasons to buy gold. “There are good orders out there,” notes Norman, “at current levels physical demand is picking up quite strongly … quietly [we will see] firmer prices slightly supported by physical [demand].”

As September’s brutal selloff in gold proved, the metal isn’t the perfect safe haven. Investors buy it as protection and then sell it when disaster strikes. Those who want to own gold for decades hold the metal but those retail investors entering the market during times of panic are the first to sell. It’s possible that those investors are tentatively buying gold as the situation in Europe gets worse.

Greece announced that it will not meet its 2011 and 2012 deficit forecasts but still needs its next tranche of bailout money — 8 billion euros — by mid-October to keep paying its bills. Greece is also having to pay a 23% interest rate to borrow money, which means their financial situation won’t resolve by just cutting spending, laying off public workers and raising taxes.

“It’s almost a case … of mathematics now,” says Norman, “[debt] can’t be paid down in Greece.” Norman, whose business is based in England, says that there is a policy vacuum in Europe and “while that remains the case gold will bid up.”

George Gero, senior vice president at RBC Capital Markets, also thinks that gold’s rally Monday is due to portfolio managers buying back gold in the fourth quarter after selling it at the end of the third and short covering — when traders buy back stock after previously betting against it. “Technically we need a strong close over$1,675 to keep this from just being another rally but there are enough reasons for buyers of gold to prevail now.”

Gold mining stocks were mostly lower Monday. Kinross Gold(KGC) sunk 2.98% to $14.34 while Yamana Gold(AUY) was adding 0.59% at $13.58. Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) were trading lower at $59.02 and $16.69, respectively.

–Written by Alix Steel in New York.

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