Gold Could Fall To $1,000 If It Breaks Through Key Resistance

June 27, 2013 at 09:11


Not too long ago, gold was making all-time highs as investors poured into the yellow metal seeking safety.  That is old news: the gold trade has completely broken down since last September, with bullion now down more than 30% since then, and possibly making its way down to $1,000 an ounce if it breaks through key levels of resistance that are fast approaching.  Initially fueled by a rotation into stocks, and currently exacerbated by fears that the Bernanke Fed may taper QE sooner than expected, the recent rout in gold doesn’t seem set to stop any time soon.

Several factors have contributed to gold’s fall, which has completely dissociated from supply and demand fundamentals, according to Mark O’Byrne at GoldCore. O’Byrne, who suggests gold’s decline isn’t justified by “somewhat positive U.S. economic data” and that “the falls are out of proportion to what is happening in the physical market in terms of supply and demand,” believes momentum trading and sentiment are playing a major factor. “Sentiment is as bad, if not worse, than it was during the 2008 sell off when gold bullion fell from $981 per ounce to $682 per ounce or 31%. Gold is now down 35% from its highs in August 2011 – a much longer time period,” he explained.

Price action in gold provides “a tangible signal that Fed tapering concerns persist,” Nomura’s economics research team said, while on Tuesday, Morgan Stanley MS -0.6% cut its price target on the yellow metal to $1,409 per ounce (they expect silver to hit $23.39).

Gold has hit its lowest levels since mid-2010 amidst a strengthening dollar, which could be tied to expectations of tighter monetary policy from the Bernanke Fed, and rising interest rates. Overall, the U.S. dollar index is substantially higher since September 2012, when the last leg of the breakdown in bullion began, and interest rates have risen dramatically, with the yield on 10-year Treasuries hitting 2.66% lately. Both of these asset classes are negatively correlated with the yellow metal, as a stronger dollar reduces the need of protection against currency debasement, while higher rates deliver greater income, a feature that gold obviously lacks.

Exchange-traded fund investors have been redeeming their holdings of the major gold ETF, the SPDR Gold Shares, which saw daily holdings hit their lowest level since February 2009. Silver has followed suit, with the iShares Silver Trust’s daily holding sliding to levels last seen in December 2012. Gold miners haven’t escaped the sellers either, with major names like Barrick Gold , Newmont Mines, and GoldCorp all taking big hits on Wednesday.

In the past, several bouts of weakness in gold prompted players in the physical market to jump in and buy the dip. This doesn’t seem to be happening this time around, with India and China, the two largest players, cramped by bank restrictions and a dangerous liquidity crunch respectively.

Still, emerging market central banks appear to be taking advantage of the situation, according to the FT, which notes that more than 30 metric tons were bought in April, according to UBS data, while the IMF indicates Turkey, Russia, Azerbaijan, the Kyrgyz Republic, and Mexico all added to their stockpiles recently.

Yet physical buyers haven’t emerged en masse and bullion seems set to continue to fall. O’Byrne notes that the next level of resistance if $1,200, which could be tested over the next few trading sessions if momentum persists. If indeed gold prices break through, the key technical level would be $1,000. If bullion falls that low, it would mark a nearly 50% retrenchment from the September 2011 highs above $1,900.