On Tuesday, the price of gold fell for a fifth consecutive day, breaking below the 200-day moving average. Though federal monetary policy is quite loose, a massive sell-off occurred last week when Federal Reserve Chairman Ben Bernanke made no mention of additional quantitative easing. In spite of all this, many market participants are still bullish on the precious metal.
Edel Tully with UBS stated that sentiment was “generally positive” and positioning was “light,” creating an excellent situation for the precious metal [according to Forbes]. Despite this, prices continue their decline. In New York, gold for April delivery fell 1.8 percent by 1:50 PM, landing at $1,674. This was a break of the $1,676 key resistance level, the 200-day moving average. During seven of the last eight trading sessions, the price of the metal has dropped. All the while, the U.S. dollar has increased, gaining approximately two percent since the end of February.
Trade of the precious metal has been based on expectations that additional monetary easing is forthcoming. According to Tully, most UBS clients expect the Federal Reserve to provide additional quantitative easing in the near future. Otherwise, the recent positive economic figures seem unsustainable. Quantitative easing has already come from central banks in England and Japan as well as the European Central Bank. The central banks in China, Brazil, and some other emerging nations will most likely implement policies to lessen the blow of a slowed worldwide economy.
Each of these signs should be bullish for the metal, which should also be benefitting from oil price increases. Tully reported that UBS analysts believe that the potential benefits of higher oil prices driving expectations of higher inflation are being “diluted” by an improving economic outlook [according to Forbes]. On the upside, if Middle Eastern tensions escalate, oil prices could go even higher. The resulting increased uncertainty and its impact on worldwide growth would most likely benefit gold, said Tully.
This makes one wonder why prices of the precious metal are trending lower. According to experts, caution could be playing a role. Tully noted that investors had a difficult time in 2011 and are now thinking strategically, focusing on profit taking and short-term objectives. Momentum could also be affecting prices. Though large market players claim to be bullish, they are waiting for each other to make the first move. Tully anticipates that a price floor will form at the lower $1,700s, which should help rebuild investor confidence.
Physical gold is not the only precious metal-related investment feeling the pain. Goldcorp, Newmont Mining, Barrick Gold, and other major gold mining companies are all in the negative and prices of silver have also fallen. Richard Fisher, president of the Dallas Fed, recently made an accusation that Wall Street was “hooked on monetary morphine [according to Forbes].” He advised investors not to expect additional quantitative easing unless the U.S. economy experiences a serious decline. The golden metal appears to be trading with risk assets and has fallen with other investments.
Though investors are remaining positive, this has not yet led gold prices higher. Some analysts are holding short-term speculators within the futures market responsible for the decline in prices. A long liquidation could be to blame, they say. Data from organizations like the CME Group seems to support this belief. According to Bill O’Neill, a LOGIC Advisors principal, the increase in hedge fund and large-speculator longs within the gold market has been building, which leaves the precious metal vulnerable to substantial liquidation if the market backs down. The market will continue to experience sharp moves due to the spec long position and little new buying, said Mr. O’Neill.
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