Gold dropped hard and fast against all currencies as New York opened today.
Between the morning and afternoon Fixes in London, gold dropped $9 to $645.70 per ounce.
"Gold's up $50 on the year, so there'll be profit-taking," said one Chicago trader to Bloomberg. "We're all getting rewarded for buying dips."
Buying the dips has proven a wise course so far this year. Gold's sharp jump of the last month saw it gain more than 8% this week alone before the sell-off in New York.
So profit-taking by short-term traders was to be expected. But "longer term, I am still fairly friendly towards the market," says a precious metals dealer in London.
"I think there is a chance it could move higher," he adds, noting the likely physical demand due from China ahead of the Lunar New Year in mid-Feb.
Problem is, higher gold prices deter jewelry buying and encourage scrap supplies to rise. "There's some selling emerged after gold's recent gains," said Wang Xinyou, senior gold analyst at Agricultural Bank of China in Beijing, to Reuters earlier today.
"[But] if you juxtapose the recent strength in precious metals with the sluggish performance in some of the base metals such as copper, it shows that people are still focused on US currency weakness in the medium-to-long-term...
"Gold will also retain its appeal as a safe heaven," he added, citing the Middle East's ongoing conflicts and the threat of trouble caused by North Korea's regime.
"We receive a lot of scrap [gold] from Indonesia and Thailand," said a Singapore dealer. "We had expected the price to fall below $640 this week, but it didn't happen...Higher prices encourage sales from jewellers."
China's jewelry demand in 2006 didn't change in tonnage terms however, despite gold averaging a 35% rise from 2005 in Dollar terms. And Chinese gold demand may also get a boost from changes in the country's tax rules.
The World Gold Council today asked the Beijing government to review China's 17% value-added tax charged on gold bullion bars.
"We see a huge demand potential given the Chinese people's large bank deposits," said Albert Cheng, the WGC's managing director for the Far East, today.
China's private bank deposits are now valued around $2 trillion. If gold trading became easier for private individuals – as it did in Europe when VAT was removed from gold bullion bars – the effect could be dramatic.
To learn more about China's growing demand for investment gold – plus in-depth analysis of the cost problems facing the world's gold mining companies – click here and read on...