Meltdown: Gold may fall to $1,100

Gold price closed the week ended June 22, 2012, at $1,566.60 per ounce, taking another weekly hit, and closed down by more than $60 an ounce, or 3.8 per cent, over their previous week’s close.

The yellow metal is now down by more than $200/oz, or 11.7 per cent, since its 2012 high of $1,773.6 per troy ounce achieved on February 24, 2012.

In fact, the metal has been in a spot of bother ever since it made a lifetime high of about $1,920/oz in September 2011, and has lost about a fifth of its value since then.

So, where to from here?

Unfortunately for the gold bull, the short answer to that question isn’t very cheerful.

“Breaking below $1,500-$1,520 range could trigger long-term investors to start selling as well, pushing the prices even further down to $1,350 or $1,100 levels as next possible supports,” says Zeki Muderrisoglu, Fund Manager and Senior Technical Analyst, NBAD Asset Management.

Strangely, the global economic uncertainty that would have, at another time, propelled gold prices to fresh highs is actually pushing down the prices of the yellow metal. Why?

“There are a number of indicators I check to see how extreme prices are. If we go back to August/September 2011 and look at the charts, we can clearly see that all of these indicators were at or near their all-time-highs. I’m talking about long-term charts here. The same was true for medium and short-term charts as well. So a correction was imminent and we were waiting for a triggering event to start going down,” says Muderrisoglu.

“Interestingly at that point we saw gold crushing from $1,912 to $1,702 in a matter of three days. From there it bounced up again to test a new high of $1,920, but could not have even one daily close above previous high. After breaking below the previous low (support level) of $1,702, it became more apparent that something was changing, something that could be the beginning of a reversal in the prolonged gold uptrend which started in year 1999,” he adds.

“Meanwhile, volatility increased and we started to see daily ranges of $100 and more quite often, so the risk especially for short-term and intraday traders became too high to tolerate,” he explains.

That said, however, there is no confirmation yet that the long-term uptrend in gold has been certainly reversed, and that the metal will only fall from here.

“As we stand today still there is no confirmation of a reversal in long term trend,” acknowledges the NBAD expert. “We need to see how the setup looks if and when this happens but right now we are slightly in the oversold territory. This might explain why we have already tested $1,520 level five times but failed to break it. So we might continue to consolidate around current levels until oscillators reset and we start a new trend from there.”

Even long-time gold bulls can’t argue with that theory. Franklin Sanders, a precious metals bull and commentator, says in his latest commentary that “if the gold price doesn’t hold $1,525 and silver 2615c, they will drop much further, as low as $1,450 and 2250c.”

Sanders, who publishes his daily metals commentary on The Moneychanger, is a self-acclaimed believer in the intrinsic value of gold. Even he admitted in his commentary published on Friday, June 22, 2012, that if gold and silver intend to continue falling, “Monday and Tuesday will be painful days.”

Nevertheless, Sanders said that physical demand for gold and silver at these prices remains “huge”, and that if the metals continue to fall further, “expect even more buyers to crawl out of their hiding places.”

Muderrisoglu, on the other hand, explains the fundamental reasons behind the metals’ decline. “If we have to look at some fundamental issues and the bigger picture, we can see that bond prices (US Treasuries and German Bunds) are at extreme levels, which means they are overbought. This means we can expect bond prices to decline which means interest rates should rise.”

That’s in theory. But as Muderrisoglu explains, “due to current economic conditions, there is no way the US Federal Reserve or the European Central Bank (ECB) could raise the interest rates at the moment.”

In fact, the ECB on Friday made it easier for banks to take out its loans by allowing more kinds of securities to be offered up as collateral, a crisis measure that could support Spain’s hard-pressed lenders, but something that means more risk for the central bank’s own finances.

Troubled banks across Europe are having difficulties borrowing money normally from other banks so they can continue making loans and doing business. Other banks are reluctant to lend for fear they may not repay the money. Some banks have fallen back on the ECB’s credit window as a last resort.

“So on one hand we have record low interest rates which should rise but could not due to economic conditions; on the other hand we have stocks coming down with all sort of concerns (economic slowdown, lower demand, high unemployment rates, EU crisis etc.),” the UAE expert lists.

“If we look at the business cycle, this is where commodities should be declining – which is what’s happening in gold, silver and oil. It means producers do not need so much raw material right now, demand is less so what’s happening is perfectly normal in my opinion. Additionally, there were rumours that some central banks started selling gold after a long time and they might still be continuing to do so which can keep a pressure on prices,” says Muderrisoglu.

In a nutshell, that means more blood of the bullion bull on the street, at least in the short term.

Image from shutterstock

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