Is the current slide in the gold price a golden opportunity or will the yellow metal continue its descent?
Gold has just tested four-month lows around $1,580.While yet to fall back below September/December 2011 lows of $1,530/oz,the previously touted unstoppable bull trend is under question. Bulls are excited at the prospect of a good entry point before a move back towards $1,800/oz, or higher. After several months in the limelight, the Bears are now split between seeing further to fall and a prolonged sideways move.
Technical signals suggest the recent break below the three-and-a-half-year trendline of rising support is key. Where next though? Since major central banks began intervening (printing money)to help boost economic activity by indirectly lowering market borrowing costs, fears of inflation/currency devaluing have been rife. Interest in gold - traditionally considered a hedge – has been solid, buoyed by its safe haven status as the global financial crisis morphed into one of European sovereign debt.
Once the significant $1,000/oz was broken decisively in late 2009, gold became the ‘en vogue’ commodity. Throughout 2010 and 2011 it never strayed too far from its supportive trendline before correcting back. Mid-2011 saw the gold bug go pandemic, and a meteoric rise from $1,600/oz to $1,900/oz, in just one month. Since then, however, the long-term trend of rising highs and lows has faltered, with a significant correction since last September. While yet to register a new 10-month low, leaving the long-term uptrend intact, increasing attention is being paid to this new short-term trend of falling highs.
Gold is a finite resource, with no income. Real demand comes from industry and jewellery (which has been solid this year, and supply constrained), however, a significant increase in speculation on commodities and FX means this is what is moving the price more. Commodities being principally denominated in US dollars (negative correlation), and the FX market itself being based on relative strength of currencies versus the US dollar, adds to the volatility of the metal’s pricing.
While traders/investors bought gold as a safe-haven during the crisis last year, the metal is now trading more in-line with its traditional drivers (the dollar and other commodities). Changes in expectations regarding more/less QE by the Fed/ECB/BoE and the relative impact on their respective currencies is sure to have some bearing on the direction of the dollar as a go-to currency in times of worry, with a knock-on effect for the metal.
After its recent sharp decline on renewed euro-zone fears (euro ditched in favour of US dollar, making gold more expensive), the metal looks to have steadied at recent lows (Euro less shunned, US Dollar less in demand,) thanks to Spain moving to help its banking sector and Europe approving Greece’s much needed next tranche of aid, despite political uncertainty after recent elections and worries about a euro-zone exit.
Gold is moving on the need (or not) for a safe-haven, depending on your view of how the European crisis evolves, and, the need (or not) for an inflation hedge, should Central banks print more money to help unblock the credit system. It is also tradable as a pure commodity, based on supply and demand. We can have any combination of these, in varying strengths competing to move the price at any one time. This makes the volatility of the metal all the more interesting for short traders using CFDs and spread bets.
Technically, we expect a rally back to the trendline before a further faltering and possible bigger drop to September/December 2011 lows. If we get a strong move back through the trendline, however, the original trend may be restored and upside possible to the prior highs. Looking at macro data, it’s supportive of more stimulus (GDP soft, jobs data unconvincing), but the central bankers appear to be holding off for now, either concluding things just aren’t that bad or worried about stoking persistent inflation any more.
Michael is head of research at Accendo Markets. After a decade in equity and hedge fund research, he now focuses on market observations and trade ideas for execution-only clients. Tweet @Accendo_Mike
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