Gold hasn’t fallen in such a manner since the 1980’s, more than 30 years ago. Considered a “Safe Haven” for investors, the precious metal is used to hedge against falling stock market prices.
Of course, there are many uses for gold in the modern world, not just as a currency. Jewellery is the second biggest use after currency, and is used heavily in computers.
But it is as a backing to the financial sector that has seen the gold price chart break long-term support levels and fall $192 an ounce, or 12.3%.
The reasons Gold had been bought up so much were over fears of a potential Global Recession (the European sovereign debt situation and US Financial crisis being the catalysts). Now we are seeing a change in the support for gold as various bearish factors are starting to align.
Firstly, the various President’s of the US Federal Open Market Committee (FOMC) have started to hint to an easing of bond-buying stimulus later in the year. At the same time, there are increasing inflationary pressures as the costs of goods and services (living) is increasing, yet wages are not and unemployment is also not decreasing.
With this shift in Gold fundamentals, there has been an outpouring of investors on Gold Exchange Traded Funds (ETF’s), driving the panic selling.
The European sovereign debt situation is still causing issues, but it is the involvement of Central Banks and their holdings of Gold as a reserve that could be the saviour of the yellow precious metal. Central banks are rebalancing from the US Dollar and the Euro to Gold, actively diversifying their reserves. The US dollar is still the primary global currency, but its long-term dominance is less certain.
Central banks hold gold as a reserve of value and as a guarantee to redeem promises to pay depositors, note holders, or to secure a currency.
As the price of Gold broke through 1,530, an overabundance of Stop orders have been triggered, fuelling the downwards drive. The million dollar question is whether or not we are now going to see a rebound or if this is a Dead Cat Bounce (dead cat’s don’t bounce, so we’re not likely to see a recovery).
We can’t see any fundamental reason for buyers to return to the gold price chart. And although this recent market collapse in the precious metal is an extreme movement, it has played exactly into our hands. Referring to our article published on the 10th December 2012 (Gold Price Forecast 2013), our ‘prediction’ for 2013 was for Gold to break the long-term uptrend and trade down to $1,200 an ounce.
There’s still $150 an ounce to go in that outlook, but for the time being we can see no reason why Gold would rally. Unless there are more headlines coming out of Europe of a member country defaulting on their sovereign debt, or a collapse in China, Gold has shifted to a new paradigm. We need to let the dust settle before we even consider buying the precious metal back up again.