This Blog has been bearish on Gold since the beginning of this
year, warning of the start of a bear market on the yellow metal .
Let me try to summarize why Gold is plunging from the FA and TA
perspective
QE Factor
The advent of the QE helped gold to catapult from
$800 in 2008 to $1900 in 2011. Gold has benefited from its role as insurance
against a very expansionary monetary policy in the U.S and
Europe.
After hitting a high of 1800 in October of 2012, gold has plunged 35% and dropped dropped to a recent low of $1,200. What has changed since the fall to make this safe haven investment not so safe? . The idea of the Federal Reserve ending QE has returned as the major theme driving markets. With Fed hinting of wind-downing QE, possibly by the end of the year. Buying Gold as an insurance to hedge against QE is becoming obsolete in a low inflation environment where the U.S. dollar trades on the strong side. Coupled with improving US economic data, the US Tsy 10yr yield jumped from 1.6% to 2.6 from November 2012 to Jun 2013.
After hitting a high of 1800 in October of 2012, gold has plunged 35% and dropped dropped to a recent low of $1,200. What has changed since the fall to make this safe haven investment not so safe? . The idea of the Federal Reserve ending QE has returned as the major theme driving markets. With Fed hinting of wind-downing QE, possibly by the end of the year. Buying Gold as an insurance to hedge against QE is becoming obsolete in a low inflation environment where the U.S. dollar trades on the strong side. Coupled with improving US economic data, the US Tsy 10yr yield jumped from 1.6% to 2.6 from November 2012 to Jun 2013.
India and China Factor
According to a US money manager GMO, between 2000 and 2001,
consumer in emerging markets accounted for 79 pct of total demand , thus Gold
prices closely tracks the economy of China and
India. The downturn in the China's economy also weigh on
gold prices as the world's second largest economy is also the second largest
consumer of gold.
Lately India, the largest consumer of Gold has taken
steps to curb gold imports.
All these factors are damaging the appeal of gold.
Emerging Markets Factor
Emerging markets currencies like
the rupees, rupiah and aud has fallen 10-15% in the last 3 months.
The
weakening of emerging market's currencies and the declining current account
balance are slowing the demand of Gold in the emerging markets.
Will gold fall further?
-- As a trader, $1,200 is a critical level that sits right at the longterm trendline support and it marks a 50% retracement (from $800 in 2008 to $1900 in 2011) , it briefly touched this level and rebounded. The real technical support of Gold lies between the $950 to $1,000 region where it traded between Jan 2008 to Mar 2009. I believe Gold will attracted to the $1,000 round number level and will eventually reach this price objective.
-- As a trader, $1,200 is a critical level that sits right at the longterm trendline support and it marks a 50% retracement (from $800 in 2008 to $1900 in 2011) , it briefly touched this level and rebounded. The real technical support of Gold lies between the $950 to $1,000 region where it traded between Jan 2008 to Mar 2009. I believe Gold will attracted to the $1,000 round number level and will eventually reach this price objective.
All posts and charts are for educational and illustration purposes only
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