Gold futures have fallen hard in recent sessions, amid news that investment demand for the yellow metal has begun to slow. At least that's what data released by the SPDR Gold Trust (GLD) shows, after holdings have stalled at a record 1,028.98 metric tons since February 19th.
This may actually be a somewhat deceiving gauge of investor sentiment, as some investors have switched their holdings of GLD for mining stocks. In the past week and a half, the Wall Street Journal and several other respected publications have touted mining stocks' superior returns compared to Gold ETFs and futures. Investor sentiment has become extremely bullish for Gold - too bullish for some.
With Gold prices once again eclipsing the $1,000 an ounce mark, bullish sentiment and the wave of euphoria among Gold bugs gave funds an opportunity to take profits with the knowledge that there would likely be enough buying interest to safely exit the market for the time being without pushing prices too far down. Other factors also played into this correction. The extremely bullish sentiment also happened to coincide with technically overbought conditions.
While the Dow [[^DJI]] has taken out November lows, the broader-based S&P [[^GSPC]], Nasdaq [[^IXIC]] and Russell 2000 remain above their key lows for the time being. This is hardly encouraging news for stocks, as key support remains within earshot, but it may be enough to give traders some hope to cling to.
The World Gold Council also reported robust demand for Gold jewelry last year in the Middle East, but a deeper look into the figures shows demand rising very modestly at the end of the year. Indian jewelry demand has also faded, which has troubled some market observers. Given the great uncertainty surrounding the economy, the value of Gold as a safe haven investment has not faded.
What has been somewhat peculiar is the fact that prices have fallen so sharply after President Obama's speech to Congress outlining some very bold economic plans, including a $634 billion health care fund. It seems that with each passing day, the US government adds to the swollen deficit and expects to make up for these shortfalls by simply increasing taxes for those in the upper income brackets. This does not bode well for the economy or the stock market. There also seems to be dissent between the executive branch and Fed Chairman Bernanke on how the banking crisis will be handled. The administration is weighing the option of nationalizing banks, but the Fed Chairman has spurned the idea. This is very early in the President's tenure, but he will have to find some way to get everyone on the same page and stop sending mixed signals to the market. Failure to do so could be considered bullish for precious metals. The swelling deficit may cause treasuries to lose their appeal as a safe haven investment.
The economic uncertainty around the globe has been positive for the greenback, as traders have been flocking to Dollar-denominated assets, but devaluation via falling treasury interest poses a significant risk of sparking inflation if and when the economy gets back on track.
The April Gold chart now shows major chart damage as a result of heavy selling pressure. As previously noted, the RSI indicator was giving overbought readings, which may have contributed to the correction. Prices are quickly approaching the 18-day moving average. A close below the average would suggest that a recent high may be in place. The April contract may also be attempting to confirm an uptrend line. Failure to confirm this uptrend suggests prices may come down further to test a far less steep uptrend. For the market to maintain its upward momentum, prices must stay above support at 928.40. Momentum has fallen to a lesser degree than both price and RSI, suggesting the market may be poised to turn back upward.
Robert Kurzatkowski, Senior Commodity Analyst
updated Feb 26, 2009
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