Spot gold daily price chart
Gold, once considered a safe haven asset and least volatile commodity, has witnessed a sharp $200 per troy ounce sell-off in just two trading sessions leaving most market players awestruck and struggling for an answer. Market players are now struggling to point a finger at an event or information which triggered the sell-off.
The amazement at gold movement is evident from following comments. Dennis Gartman, editor and publisher of The Gartman Letter was quoted stating that there are a lot of people throwing up their hands, throwing positions overboard. Panic is everywhere.
Hedge fund manager John Burbank said the recent sharp selloff in the precious metal came as a surprise to many investors
Some of the reasons stated for the fall are reports of gold sale by Cyprus, ETF outflows, uncertainty about US central banks asset purchase program and downbeat price forecast by major investment banks. China’s disappointing GDP data added fuel to the selling in the market.
While these factors make a bearish case for gold, the fall of such momentum cannot come unless we see massive selling in the market. Market reports suggest that a futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting and spooked the markets contributing to the decline. The order was believed to have been placed through Merrill Lynch’s brokerage team.
Gold has been sitting on a variety of negative factors and the recent fall seems to a culmination of these factors in form of a massive sell-off by some big players.
Gold’s modest gain last year disappointed some market players who preferred to shift to other asset classes for better returns. This is evident from the steady outflow from gold ETF’s. Gold holdings with SPDR Gold Trust, the biggest gold backed ETF, have fallen by 196 tonnes so far to 1154.344 tonnes
Optimism about US economy also put pressure on gold as equities were seen as a better bet. US political leaders reached a fiscal deal early in the year to avert a fiscal showdown. Meanwhile, economic data pointed to improvement in the economy. This pushed US equity markets higher further diverting people from assets like gold. There was little negative reaction in the market even when automatic spending cuts got triggered in March.
Improvement in US economy also raised doubts about sustainability of the monthly $85 billion asset purchase program announced by Federal Reserve last year. Fed officials have discussed the costs and benefits of the asset purchase program and some have even suggested tapering or ending the asset purchase program. However they lack consensus hence we have not seen any decision so far.
Another disappointment for market players was gold’s failure to rally despite some supportive factors. Euro-zone came back into focus with weaker economic data, political instability in Italy and bailout for Cyprus. However this failed to increases gold’s appeal as an alternative asset.
Gold failed to gain despite aggressive monetary easing measures announced by Bank of Japan to support the economy. The metal was also unfazed by increasing tensions in Korean Peninsula following North Korea’s nuclear test.
In last few days, a series of event added to downbeat sentiment for gold. In its April 10 report, Goldman Sachs slashed its short- and long-term gold forecast for gold and suggested to sell. Goldman sees gold ending the year at $1,450, a forecast that came down from $1,600 at the end of February and $1,810 prior to that. Goldman sees gold falling to $1270 by the end of 2014.
FOMC minutes released on April 10 noted that Fed officials discussed costs and benefits of the asset purchase program while acknowledging the improvement in US economy.
On the same day came reports of gold sale by Cyprus, the fifth euro nation to get a bailout. An assessment of Cypriot financing needs prepared by the European Commission showed that Cyprus has to sell excess gold reserves to raise around 400 million euros to help finance its part of its bailout. As per World Gold Council data, Cyprus has gold reserves of about 14 tonnes and with current price 400 mn euros would amount to a meager 10 tonnes sale.
However reports of Cyprus gold sale fuelled speculation that other European nations will follow suit. As per WGC data, euro area including the European Central bank holds around 10000 tonnes of gold.
While negative news kept pouring in, gold was standing at a key level near $1550/oz where price had taken support at previous occasions. Gold plunged after failing to hold through that level. The losses were extended further this week when Chinese GDP data came in below market sentiments. The downbeat sentiment snowballed in a sell-off as investors rushed out of the metal.
The recent fall in gold price shows the intensity of bearishness in gold market. However we believe that the recent fall is overstretched and some of the market fears are unfounded. The US economy is showing signs of improvement however growth is not strong enough to scale back the stimulus. We believe that the asset purchase program may stay in place for next few months. Also the fear of central bank sales seems over bloated. Central bank sales have been negligible in last few years despite slowdown in global economy and bailout of many states in euro-zone. Also the agreement between central banks, the CBGA agreement, restricts gold sale at 400 tonnes in a year. European central banks will not disrupt the gold market by selling the metal in an unorganized manner.
The sharp drop in gold price will further narrow down the profit margin for gold producers reducing the incentive to produce more gold. This could affect mine production and thereby supply in the market. Barrick Gold Corp., the world’s largest gold producer, projects all-in costs of $1,000 to $1,100 per ounce for 2013. However price has to stay low for a significant time to affect production in an adverse manner.
On the demand front, the severe correction in gold price will increase appeal for the metal for consumers especially in India. Lower gold price will also keep central government away from hiking import duty again. Wedding season and Akshay Tritiya on May 13 could the major buying events. However we may not see a sharp spike in demand. Investment demand will be affected by the drop in price.
The drop in gold stocks at COMEX warehouses is also supportive for gold price. Stocks have fallen 18% so far this year to 9113814 troy ounce or about 283 tonnes, the lowest level seen since Feb.2010.
In the near term, we expect gold in dollar terms to form a base near $1265 per troy ounce level and rebound to $1500/oz level. In domestic terms, we may see price form a base near Rs.24600/10 gram level and recover from thereon. Price could recover till Rs.27500/10 gram level in coming days.
From a longer term perspective, the sharp correction in price has dented sentiment for gold and we may not see the rally resuming unless there is a fresh trigger. However we do not expect a sustained decline and it could be more of a rangebound movement with downward bias. We could see price ranging from $1200-1650/oz. Indian prices will also be affected by movement in Indian rupee. On domestic terms, gold may remain in a range of Rs.23000-29000/10 gram level.
MCX Gold was trading positively and holding above the long term support line S for past 4 years. Further in last two years price was trading within the symmetrical triangle (R-S) with lower tops, higher bottom formation. However, after breaching the triangular support at (S) & (23.6% Fibonacci level) at $ 1630 price gave a sharp fall and supported at previous low and major support $ 1522.
Recently the price after breaking the major support of $ 1522 gave a sharp decline and breached major support of $ 1449 (38.2% Fibonacci level) and currently holding near $1303 (50% Fibonacci level ). A breakdown of which occurred near $1449 level, which might now act as a resistance area for the price.
Further if price continues to hold below the resistance zone at $ 1449 levels on a weekly closing basis, it has the potential to test the 50% Fibonacci support at $ 1302 level in a time span of 1-2 months. RSI has broken strong horizontal support near the 40 mark and is currently pointing lower holding well below the same, which indicates medium-term bearish momentum. Until price breaches the resistance area of $ 1522 bullishness can be effectively ruled out.
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