Last week, gold has been hammered as a deluge of selling emerged from Western traders dumping exchange traded products like ETFs. In addition, fund managers sold ahead of the second quarter end for book squaring purposes.
After a heavy selling in the beginning of the week, August gold futures rose on Friday, settling at $1,223.70 an ounce on the Comex division of the New York Mercantile Exchange. Still the metal is down 5.3% on the week. On the quarter, gold prices are down 23% and 27% on the year.
However, the yellow metal did touch the bearish triangle target at the $1,200 per ounce level and the downside technical objective has been achieved. A number of signs favor the potential for a ‘bounce’ soon. The 61.8% Fibonacci retracement is at $1,175 using the weekly closes of the November 2008 low and the end-August 2011, very close to the
overnight intraday low of $1,179. Bullish sentiment is also at an extreme low, considering fund managers have aggressively reduced long exposure to gold as the quarter comes to a close. Based on the potential head and shoulders-bottom pattern, intermediate counter-trend rally to around $1,400 over the next 30 days is very much possible to unfold.
In addition to a number of gold price forecast downgrades by major investment banks, investors have been urged to sell by talk of U.S. Fed “tapering” or a reduction in level of monthly asset purchases seen each month. However, tapering is not tightening yet and it may take some good six months before it even begins. When this happens, it would mark merely the start of a pullback of the Fed’s ultra-loose monetary policy. Until then, the situation remains relatively the same.
Gold investors are now beginning to consider that holding physical gold is not simply tied to the U.S. Federal Reserve’s policy. There are numerous reasons to hold gold including simple portfolio diversification. A number of major global central banks are maintaining ultra-easy monetary policies and actually keep buying large quantities of gold on monthly basis.
For example, the Bank of Japan (BOJ) has hurtled full steam ahead with its “three arrows” program designed to wipe out deflation. The BOJ has enacted monetary policies even more aggressive than the U.S. Fed including outright purchases of exchange traded funds and REITS. Elsewhere, the European Central Bank and the Reserve Bank of Australia recently cut rates. Global liquidity remains high.
In the coming week, two public holidays and several important economic reports could influence precious metals prices. The market will mark the beginning of the second half of 2013, putting behind one of the weakest performances in recent memory. The first half of the year come to a close with the gold and silver the worst-performing commodities, with silver taking the bottom spot and gold not far behind.
However, markets go in cycles and prices never go in a straight line. Last week’s sell-off in gold has achieved an important technical target – the triangle objective at $1,200. Once the quarter-end selling is out of the way, more logical actions are expected to unfold on the trading floors.
Longer-term, Chinese and Indian investors are expected to continue building their own personal portfolios of gold as these countries continue to grow and more citizens there rise to the middle class. The demand for gold will be voracious from these countries in the years ahead for reasons having nothing to do with the U.S. Federal Reserve, but more deeply rooted in cultural traditions thousands of years old.
Ongoing and actually escalating geopolitical problems in the Middle East and North Africa may only add to investors concerns about the recovery of the global economy. Gold investors who buy physical gold usually have long-term time horizons and look to the big picture macro reasons for wanting to own and hold the yellow metal.
At present, the gold market remains in the midst of a bear market, but now it looks like it may have found ground to stabilize in the coming week. The yellow metal remains a diversification tool and a hedge against a variety of economic dislocations that may emerge in the future. These include inflation and political instability in the global sense.
