http://www.foxbusiness.com/story/markets/commodities/whats-golds-recent-slump/#
What's Behind Gold's Recent Slump?
Matt Egan
FOXBusiness
Even as economic and financial jitters sent U.S. markets to fresh 12-year lows this week, gold, which often serves as a hedge against fear, has hit a roadblock in its quest to set new all-time highs.
Under pressure from a myriad of psychological, technical and fundamental factors, gold is stuck in the midst of an eight-day losing streak, its worst stretch since September 2008. On Wednesday, the price of an ounce of gold tumbled $6.90 per ounce, or 0.76%, to settle at $906 -- its lowest close since Feb. 9.
After nearly breaking its March record high of $1,003.20 per ounce, gold prices have tumbled 9% over the past seven sessions.
“Whenever [gold] hits multi-month highs, especially over $1,000, there is definitely the tendency for people to take profits in this very nervous market,” said Ashraf Laidi, chief market strategist at CMC Markets in London.
It’s understandable for gold investors to book short-lived profits given that many of the same investors have lost and continue to lose considerable money in the equity markets, Laidi said. The Dow is off by 23% year-to-date, including a 15% plunge over the past 13 sessions alone.
At the same time, some of the fears that sent gold within a few dollars of its all-time highs have been eased in recent days.
“There was fear the United States was going to nationalize the entire banking industry, so people panicked. Gold was acting as a safe haven and as a hedge against fear,” said Phil Flynn, vice president of Alaron Trading and a FOX Business contributor.
However, in the past two weeks the U.S. government has repeatedly stated it does not intend to take over the banks. Instead, the U.S. restructured its bailout of Citigroup (C: 1.13, -0.11, -8.87%) by swapping its preferred shares to common stock and also increased capital available for insurer American International Group (AIG: 0.4331, 0.003, 0.7%).
“Oftentimes, the fear of what could go wrong is a lot worse than what actually happens,” said Flynn. “Cooler heads prevailed. People realized that as bad as the economic news is, it’s not the end of the world as we know it.”
Jon Nadler, a senior analyst at Kitco in Montreal , echoed that sentiment.
“These investment cycles are definitely emotional waves. As soon as a little bit of apprehension abates" then gold moves closer to fundamentals, he said. Nadler added that the fundamentals "hardly argue for more than $650. The rest is an anxiety premium.”
Fear also appears to be easing in the equity markets, at least for the moment. The Dow Jones Industrial Average was up in midday trading on Wednesday by 130 points as the benchmark index attempts to end its five-day losing streak.
Aside from the psychological factors, gold has also come under pressure from new data that showed demand for physical gold is down due to the weak global economy, especially in India, said Flynn.
Gold, which tends to move in the opposite direction from the dollar, has also been hurt by a rally for the greenback. Having rallied in five of the last seven trading days, the dollar is up 8.4% year-to-date against the Japanese yen.
Nadler said gold's recent $200 rally to $1,000 was built on "shaky ground" considering fundamentals.
“The $200 rally was unfolding against the background of nothing special in terms of new corporate failures," said Nadler.
As far as the long-term picture for gold, analysts were mixed about the commodity’s future.
Laidi said despite gold’s recent slump, he still believes it will reach $1,200 per ounce by the end of the third quarter due to the devaluation of currencies by central banks that have slashed interest rates to fight global recessions.
However, Flynn said gold has hit a “major double-top” at $1,000 per ounce, as the commodity tumbled from that psychologically important area in March as well.
“Before you can start being bullish on gold for the long haul, you have to prove gold can get above that level,” said Flynn.
If gold has in fact put on a "double-top" at $1,000, "this could be looking pretty grim," said Nadler.
Flynn also downplayed hyperinflation fears in the short term, saying it “doesn’t make a lot of sense” right now because gold is priced in dollars.
“Gold bugs have to hope for some more bad news or some other economic calamity. Other than that, it will take some time for gold to top the psychological resistance of $1,000,” said Flynn.
What's Behind Gold's Recent Slump?
Matt Egan
FOXBusiness
Even as economic and financial jitters sent U.S. markets to fresh 12-year lows this week, gold, which often serves as a hedge against fear, has hit a roadblock in its quest to set new all-time highs.
Under pressure from a myriad of psychological, technical and fundamental factors, gold is stuck in the midst of an eight-day losing streak, its worst stretch since September 2008. On Wednesday, the price of an ounce of gold tumbled $6.90 per ounce, or 0.76%, to settle at $906 -- its lowest close since Feb. 9.
After nearly breaking its March record high of $1,003.20 per ounce, gold prices have tumbled 9% over the past seven sessions.
“Whenever [gold] hits multi-month highs, especially over $1,000, there is definitely the tendency for people to take profits in this very nervous market,” said Ashraf Laidi, chief market strategist at CMC Markets in London.
It’s understandable for gold investors to book short-lived profits given that many of the same investors have lost and continue to lose considerable money in the equity markets, Laidi said. The Dow is off by 23% year-to-date, including a 15% plunge over the past 13 sessions alone.
At the same time, some of the fears that sent gold within a few dollars of its all-time highs have been eased in recent days.
“There was fear the United States was going to nationalize the entire banking industry, so people panicked. Gold was acting as a safe haven and as a hedge against fear,” said Phil Flynn, vice president of Alaron Trading and a FOX Business contributor.
However, in the past two weeks the U.S. government has repeatedly stated it does not intend to take over the banks. Instead, the U.S. restructured its bailout of Citigroup (C: 1.13, -0.11, -8.87%) by swapping its preferred shares to common stock and also increased capital available for insurer American International Group (AIG: 0.4331, 0.003, 0.7%).
“Oftentimes, the fear of what could go wrong is a lot worse than what actually happens,” said Flynn. “Cooler heads prevailed. People realized that as bad as the economic news is, it’s not the end of the world as we know it.”
Jon Nadler, a senior analyst at Kitco in Montreal , echoed that sentiment.
“These investment cycles are definitely emotional waves. As soon as a little bit of apprehension abates" then gold moves closer to fundamentals, he said. Nadler added that the fundamentals "hardly argue for more than $650. The rest is an anxiety premium.”
Fear also appears to be easing in the equity markets, at least for the moment. The Dow Jones Industrial Average was up in midday trading on Wednesday by 130 points as the benchmark index attempts to end its five-day losing streak.
Aside from the psychological factors, gold has also come under pressure from new data that showed demand for physical gold is down due to the weak global economy, especially in India, said Flynn.
Gold, which tends to move in the opposite direction from the dollar, has also been hurt by a rally for the greenback. Having rallied in five of the last seven trading days, the dollar is up 8.4% year-to-date against the Japanese yen.
Nadler said gold's recent $200 rally to $1,000 was built on "shaky ground" considering fundamentals.
“The $200 rally was unfolding against the background of nothing special in terms of new corporate failures," said Nadler.
As far as the long-term picture for gold, analysts were mixed about the commodity’s future.
Laidi said despite gold’s recent slump, he still believes it will reach $1,200 per ounce by the end of the third quarter due to the devaluation of currencies by central banks that have slashed interest rates to fight global recessions.
However, Flynn said gold has hit a “major double-top” at $1,000 per ounce, as the commodity tumbled from that psychologically important area in March as well.
“Before you can start being bullish on gold for the long haul, you have to prove gold can get above that level,” said Flynn.
If gold has in fact put on a "double-top" at $1,000, "this could be looking pretty grim," said Nadler.
Flynn also downplayed hyperinflation fears in the short term, saying it “doesn’t make a lot of sense” right now because gold is priced in dollars.
“Gold bugs have to hope for some more bad news or some other economic calamity. Other than that, it will take some time for gold to top the psychological resistance of $1,000,” said Flynn.
