Gold: 2011 Lows Broken, 1,250 Eyed

USD continue to rally strongly after Wednesday’s Fed disappointment, sending commodities lower across board. Gold was one of the hardest hit, falling more than 6% and hit a low of 1,272. More importantly, is the fact the price has managed to break the previous 2013 low of 1,322 and the 1,300 round figure. Current price is also below the lows of 2011, trading at levels last seen around Sep 2010. To put it in perspective, we are trading at prices before QE2 was implemented (which started in Nov 2010). Is this considering an overreaction considering that QE3 is still ongoing? Well, if we look at Gold prices post QE3, we would notice that price had been trading systematically lower ever since QE3 was announced in early Sep 2013, suggesting that price of Gold was already bearish even before Fed’s tapering announcement.

Fundamentally, there is very little reason why Gold prices will be higher due to any QE to begin with. Most of the rally of Gold since the inception of QE1 can be attributed to overreaction of market to inflation risks which drove a disproportionate growth in Gold demand since then. Speculators made the overreaction worse and resulted in the yellow metal pushing above 1,900 at one point. As with all asset bubbles, there is a limit on how much the entire market can buy – OANDA Historical Position Ratios showed a more than 90% Net Long of Gold close to the peak (which is equivalent to around 95% long positions), and price basically traded flat between 1,530 – 1,800 for an extended period of time. As speculators realized that Gold prices are not climbing any higher, the long-term holding interest of Gold decreases, as there are much more attractive options for long-term traders. Rising stock prices presented better alpha returns even after taking into consideration recent declines, furthermore dividend yields on stocks make absolute returns for stocks even more attractive. If traders were seeking safer avenues to park their money, Treasuries with stable yields make holding them a suitable option even with a sub 1.0% yield as Gold positions tend to be negative carry. This is the main reason why Gold traded lower and lower in 2013 while US Stocks and yields push for recent years/historical highs. There is absolutely no good reason to hold onto the yellow metal now.

So why is the impact of QE3 tapering so devastating? Number one reason is the strengthening of USD – this resulted in a broad decline in all commodities and Gold is similarly affected. Number 2 reason, and potentially a bigger reason is the fact that speculators are looking for reasons to sell heavily. Number 3, is the fact that fear is creeping into Gold hoarders – long term Gold buyers which had been holding onto profitable positions may see their profits eroded, and choose to close out their positions while they are still in the black – hence adding further bearish pressure on current bear trend. Without any good reasons to buy but many reasons to sell, Gold is looking at a very bearish 2H 2013.

Hourly Chart
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From a technical perspective, Gold has recovered slightly during Asian hours similar to every other asset that had decline significantly. This appears to be a mere technical rebound and does not constitute any form of bullish revival. Price is currently trading below the intersection between descending trendline (which represents the strong downtrend post Fed announcement) and the short-term support turned resistance of 1,295. Even though Stochastic levels are pointing higher, it is hard to imagine price breaking current intersection and push above 1,300 on a rebound action alone.

Weekly Chart
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Longer-term chart is equally bearish with prices looking likely to formulate the new phase of the bearish breakout seen in April 2013. Price have been making lower steps ever since the break of Descending Channel Bottom, and it is possible that price may find some support between 1,250 – 1,330. Long-term bearish target would be the 261.8% Fib extension of the pre-breakout bearish movement.

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