The year 2011 is without a doubt going down in the books as one of the most tumultuous periods in recent financial history, with everything from natural disasters to looming debt drama sparking waves of uncertainty throughout the year. Despite its safe haven reputation, even gold fell victim to volatile trading; the precious metal has endured wild swings leading up to its high of $1,923 an ounce (9/6/2011), only to give into rampant, unprecedented profit-taking pressures in the days following. Although the final stretch of the year was riddled with roadblocks for gold, the precious metal still came out on top amongst major asset classes, clinching gains of 10% during an unforgiving 2011 [see Special Report: Gold ETFs In Focus]. Recent selling pressures in the futures market have spawned numerous opportunities; with some investors taking bets that the yellow metal will continue to lose its luster, while others are taking advantage of the “dip” so to speak and getting long.
Although traditionally considered as a hedge against inflation, gold’s safe haven reputation has allowed the metal to serve as a gauge of “fear” in the marketplace; historically, when geopolitical tensions arise or disaster strikes in the stock market, the price of gold and expectations of volatility, as represented by the VIX Index, have a tendency to increase amidst the chaos. However, many gold-bugs have been biting their nails since the precious metal endured a brutal sell-off after topping out in September of 2011.
What’s worrisome is the fact that the yellow metal has been highly correlated with equity markets in recent months, which has translated into frustrating range-bound trading. Gold has failed on several occasions over the last few months to take on safe haven appeal when debt drama from the Euro zone has spilled over onto Wall Street [see Are Gold ETFs The Best Defense Against Euro Drama?]. On the one hand, many investors have liquidated their gold positions to simply take profits from the hefty gains accumulated throughout 2011. Likewise, investors remain uncertain of the outlook for the global economy, which has prompted many to sell their gold in an effort to raise cash in anticipation of more turbulence.
On the other end of the spectrum, some are convinced that the “gold bubble” has finally burst, prompting speculators to take risky bets that could pay off big time if the precious metal continues to sink [see Three Reasons Why Gold Is Overvalued]. Whatever the reason may be for gold’s recent slump, the main question that’s puzzling traders and investors alike is how low can gold prices really go?
From a fundamental perspective, few things have changed for the yellow metal. Expectations for inflation are still lingering and ongoing debt drama continues to showcase the metal’s safe haven reputation and appeal as a hard currency. Demand from emerging markets and central banks is also expected to continue increasing steadily throughout 2012. With no significant changes in fundamental price drivers, we feel it may be appropriate for investors to consider a technical analysis of gold’s price over both the long and near-term.
Consider the 5-year daily chart for gold futures prices below:
Since recently breaking below its 200-day moving average (yellow line), its important to consider that the last time that gold dipped below its 200-day MA was back in late 2008. When we consider the chart above, its quite apparent that for the most part gold prices have a history of bouncing off the yellow line. However, given the recent slip below its long-term moving average, we feel that gold could be entering an arduous correction, similar to its prolonged decline in 2008.
Assuming that gold is in fact entering a serious correction from a long-term perspective, it may be useful to utilize Fibonacci Retracements (see chart above) to have an idea of potential levels that the yellow commodity may sink to. The Fibonacci Retracement extends from the 2008 low at $681 an ounce (10/24/08) through the 2011 peak at $1,923 an ounce (9/6/11). As illustrated above, gold has dipped below the first support at the 23.6% level, which means that its price could likely sink to the 38.2% level in the near future, which would put the spot price at around $1,450 an ounce [see Investors Flock To Inverse Gold ETFs]. The 50% level is the next major area of support, which means that gold prices could potentially retest support around $1,300 an ounce.
On the other hand, if recent selling-pressures have been overblown, the yellow metal could stage a considerable recovery. The SPDR Gold Trust (GLD) could present a buying opportunity for conservative investors if it regains support above $160 a share, backed by relatively high trading volume. Likewise, if this ETF sinks below its recent low at $148.27 a share (12/29/11), selling pressures may accelerate and push GLD all the way down to the $140 level.
Disclosure: No positions at time of writing.