Gold bugs felt the heel of Fed tapering as prices of the yellow metal fell 4.5% overnight. Not only did it break below $1,300 per ounce during London trading hours, it even dipped below $1,285.
The gold market is reacting to Federal Reserve Chairman Ben Bernanke's press conference where he indicated the Fed may reduce its bond purchasing program (dubbed "QE2"). A tapering in the $85 billion per month of cash into the economy means the markets are anticipating a reduction in future inflation rates. As gold is often seen as a hedge against inflation, the gold markets now perceive there's less need for bullion.
The drop in gold came during Bernanke's press conference. At 2pm Easter Time, the precious metal was trading at $1,373.50. Two hours later, it was down to $1,350. When London traders came in, they threw gold off the decks, knocking it down to $1,300 within their first hour of trading. It then hit $1,285 two hours later.
It will only get worse for gold, according to Dr. Michael Haigh, Head of Commodities Research at Societe Generale.
In early April, when bullion was trading at $1,600, Haigh forecasted a drop to $1,375 per ounce. Just two weeks later, it indeed fell that far and then some. He is now forecasting a price of $1,200 in the last quarter of this year.
In an interview with Talking Numbers (see the video above), Haigh also says gold may hit $1,000 by 2017. For those arguing mining costs prevents gold from falling more, Haigh writes in his report this past Monday:
"We don't think that the reported very high gold production costs will prevent the gold price from trading down to $1,200/oz. And while production cost concerns may slow the price decline below $1,200/oz, this factor is unlikely to provide firm support until we get closer to $1,000/oz."
Haigh elaborates in his Talking Numbers interview, "The other element is the production companies have an incentive to reveal high costs to the world in the hopes prices remain high accordingly." Translation: mining companies say costs are high so that the market thinks there's a floor in gold prices.
On the technicals, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, has four technical reasons he believes gold will hit $1,000. Ross has already called for $1,000 before on Talking Numbers.
To hear the full interview with Haigh and to see four reasons Ross believes gold will fall to $1,000, watch the video above.