Massacre on Gold Prices Continues
Gold prices were struggling to recover Thursday after a brutal selloff pushed gold through pivotal technical levels.
Gold for February delivery dropped $9.70 to settle at $1,577.20 an ounce at the Comex division of the New York Mercantile Exchange but was continuing lower in after hours trading. The gold price has traded as high as $1,596.50 and as low as $1,562.50 an ounce while the spot price was down $9, according to Kitco’s gold index.
Silver prices added 33 cents to close at $29.27 an ounce while the U.S. dollar index was shedding 0.27% at $80.31.
Gold failed to reclaim the $1,600 an ounce level after Wednesday’s session left gold in the intensive care unit. Leading the charge out of gold was a stronger dollar and technical selling. Once gold broke below its 200-moving average of $1,618, many sell stops were triggered — where traders are forced to sell to protect profits, which further accelerated losses and activated more sell stops.
“Was it panic selling?” Asks Jeffrey Wright, senior research analyst at Global Hunter Securities. “No, more program selling that overwhelmed the bids that were in the system.” Wright thinks gold’s massacre and subsequent volatility is predicated on short term headlines and a lack of resolution out of Europe as well as light volume. “As we get closer to holidays there are less market participants and less on the retail side … when you have a sharp event and you don’t have the breadth of market liquidity it can make these moves sharper because there is no one to participate.”
Gold Thursday did close off of its session lows, but the question is just how much damage was done.
“It’s crazy and the downside could get more scary,” says Mihir Dange, founder of Arbitrage, “my guess is it would bounce here and then we will see what happens.”
Bespoke Investment Group said that the six times gold closed below its 200 day moving average since 1976, gold has risen on average almost half a percent in the next week, 1.5% in the next month, almost 5% in the next three months and 9% in the next 6 months and over 21% in the next year.
Scott Redler, chief strategic officer at T3Live.com, said that if gold can reclaim the 200-day moving average, now at $1,610 an ounce, within the next couple of sessions then that “would be more bullish than bearish.” But that kind of rally might be tough for gold.
Gold is caught between generally bullish long-term fundamentals, including limited mine supply growth, net official sector demand, steady exchanged-traded fund holdings, a modest recovery in jewelry demand, a reduction in recycled supply, a lack of confidence in government policies, and short-term bearish factors,” said James Steel, analyst at HSBC Securities.
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Among the negatives for gold is a lack of safe haven buying, a persistently weaker euro, with which gold has been moving in tandem, and lower prices, which might shake out investors as well as traders as they seek to lock in profits for the year. “We believe gold will have a tough time rallying until the euro bounces, or at least stabilizes,” says Steel.
The euro was helped Thursday after a relatively successful debt auction in Spain. There was solid demand and yields were either lower or only slightly higher than the previous auction depending on the duration. The U.S. dollar index was slipping, but was off its lows on a slew of positive U.S. economic data from lower unemployment claims to stronger manufacturing data.
Despite the recent carnage in the gold market the physically baked ETF SPDR Gold Shares(GLD_) shed less than one ton this week which means the ETF fell along with the underlying commodity price but that there were consistent buyers to meeting any selling.
“It’s not necessary to wait for the final selling climax in any major event,” says Richard Hastings, macro and consumer Strategist at Global Hunter Securities. “Just look for a few major selloffs and build new positions, and ignore the risk of a final climactic panic event.”
“Gold being down 5% is interesting,” says Rodney Lake, senior investment officer at George Washington University. Lake has sold down their physical gold position recently in favor of gold stocks, “we are not sure where things are going.” This means that the uncertainty is keeping some investors on the sidelines. “We would want to see this last a little longer, want to see more of a sustained move down.”
Jon Nadler, senior analyst at Kitco.com, is more skeptical, however, thinking that investor psychology could have been seriously damaged. “We have a crowd that has not seen a bear market in gold in its lifetime … So we need to shake out the weak longs, but perhaps the confidence level of the strong retail investor has also been badly shaken.”
Nadler says that hedge funds have changed the landscape of the gold market over the last five years, since the introduction of the gold ETFs, and the question remains what will happen to gold if they leave.
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