Gold sell-off threatens to get ugly
With the advent of the financial crisis in 2008 gold prices went on a tear rising from lows of $680 an ounce in 2008, to hit a peak of $1,921 in September 2011 with a lot of speculators queuing up to predict the yellow metal to push through $2,000 an ounce.
Since then the total supply of money in the global economy has grown by trillions of US dollars as central banks have continued with their zero interest rate policy, and in the case of the ECB, negative interest rate policy.
Fears of an inflationary spiral have so far not materialised, despite the doom laden prophecies of a few years ago and this has reduced the attraction of gold as an investment haven, and in 2013, despite a brand new stimulus attempt by the Federal Reserve in the form of QE3, the yellow metal has continued to fall in value hitting a low of $1,180 in June 2013.
Since those lows in mid-2013 the extent of the rebound has been the highs in August 2013 of $1,437, with each subsequent rally lacking any real conviction.
With the Federal Reserve now looking at the exit for its current stimulus program and price pressures across the world looking fairly controlled the allure of gold continues to diminish with speculation rising that we could well see a break down towards the $1,000 an ounce level, which precipitated the initial rally higher in 2009.
Gold prices are now approaching a significant support level between $1,150 and $1,180 an ounce. The $1,150 level is the bigger support level given it is 61.8% Fibonacci retracement of the up move from the 2008 low, to the all-time highs at $1,921.
A significant move through the bottom of this sideways triangular consolidation could well precipitate a sharp down ward thrust towards $930 an ounce if we get further evidence of a significant improvement in the US economy and no more geopolitical shocks before the end of the year.
There almost seems to be a degree of complacency amongst investors about the decline in gold prices, with a general feeling perhaps that the downside is limited due to the fact that miners will simply cut production if the price falls too far and cut into margins.
According to the World Gold Council the industry standard costs of producing an ounce of gold have been estimated for the industry to fall between $1,100 and $1,200 an ounce, which would seem to suggest that business profitability for gold miners is already starting to become difficult, which could well cause further turbulence in a sector that has underperformed in the past three years.
When prices started to rise in 2009 a lot of miners unhedged themselves from declines in gold prices meaning that they probably aren’t protected from a sharp decline in prices.
With demand in China, Russia and across the globe set to remain weak, and the US dollar looking to make a comeback a break through the lows of the past two years could well spark a panic sell-off, as investors look to mitigate lower prices.
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