The next couple of weeks loom as a critical time for the gold price following sustained selling pressure since the end of February. Over that time, the precious metal has fallen by USD 160 to USD 1,625, although, for the year to date, it is still up by 4%. Should the gold price take out last December’s low at USD 1,522.65, then from a technical perspective this would be a very bearish signal indeed.
Since the beginning of last summer, trading gold has not been for the faint-hearted. Early in July it was trading near USD 1,500; two months later it reached a record high above USD 1,900, only to collapse to USD 1,532 later that same month. Over the past six months, it has had two attempts at penetrating the USD 1,800 level but without success. Worryingly for the bulls, the gold price has consistently failed to sustain challenges of the key 100d and 200d moving averages over the past month.
Two recent developments account for gold’s demise. Firstly, Indian demand has slumped as gold jewellers in the country remain shut in protest against the government’s decision to raise the import tariff on gold to 4%. India consumed 993 metric tons of gold in 2011, according to the World Gold Council; the penchant for gold in India is a major contributor to the large current account deficit.
Secondly, the dollar has been enjoying something of a renaissance in the last couple of quarters as confidence in the sustainability of the US recovery grows. As a result, gold has lost some of its lustre as a safe-haven, with investors more prepared to shed their defensive instincts and put more of their capital to work in risk assets. Also, the Fed made it clear this week that further quantitative easing was not under consideration, as policy-makers themselves become less concerned about the economy. Tomorrow’s payrolls figures loom as another important test of the US recovery thesis.
Traders themselves have been progressively reducing their record long positions in gold over the past two years, although cumulative long positions remains historically elevated. Also, gold ETF holdings remain at a very high level, however over the last couple of weeks the falling gold price has reduced the value of these holdings. Thus far, there are very few signs that gold bulls have given up hope.
Gold has enjoyed a decade of rising prices. It could very well be that this trend is broken in 2012.