Gold Sharply Down Due to Profit Taking
05 Jan 2011 | 1st resistance | 2nd resistance | 3rd resistance |
Today’s resistance US$ | 1407 | 1433 | 1449 |
1st support | 2nd support | 3rd support | |
Today’s support US$ | 1364 | 1348 | 1321 |
Today’s pivot point US$ | 1391 |
The Day’s Story:
Gold price came under severe selling pressure as traders decided to take profit after recent gains. Gold ended sharply lower as stronger greenback and falling crude oil prices put further pressure on bullion. It was gold’s biggest one day loss since November last year. Profit taking in early session triggered sell stops which forced investors to close their positions to lock profits. Yesterday’s price fall was more to do with technical selling than anything else according to analysts but no major technical damage has been inflicted on charts yet and a long bearish candle was mainly due to a corrective pullback. Bargain hunters stayed away in later part of the session as they did not want to get stung by sharply falling prices but a further dip in prices will tempt them to buy gold at discounted price. This so-called January effect for gold doesn't always pan out. In 2010, gold prices slid from $874.50 to a low of $810 mid-month before climbing 3.7% higher in February.
Stocks in U.S ended mixed after trading without any particular direction throughout the session as the recent rally has risen concerns among investors that stocks may have been overstretched. The Dow Jones closed up 20 points at 11691; S&P 500 finished 2 point lower at 1270 while NASDAQ fell 10 points to finish its day at 2681. All three main U.S indexes recorded double digit gains in 2010 with DOW finishing 2010 up 11%, S&P 500 13% and NASDAQ 1%. Stocks on Tuesday reacted little to economic data that suggested U.S economy is well on its way to recovery. December factory orders rose by 0.7% after a 0.7% fall a month earlier. Market was expecting a fall of 0.3%. In a separate report, December auto sales rose more than market forecast with companies like GM and Ford reporting surprisingly encouraging figures. Toyota was the biggest loser as its sales fell by 5% in the month. Stocks in Europe also ended mixed with Britain’s FTSE 100 closing up by 1.7% while DAX in Germany fell 0.3% and France's CAC 40 advanced 0.3% to finish the day.
U.S. dollar index which measures the dollar against six major currencies traded firmly throughout the session and ended its day with decent gains. Euro gave away some of its recent gains and came off its 3 week highs against U.S dollar at the back of stronger factory order numbers. Gold price took its lead from Dollar movement and moved inversely with greenback in yesterday’s session. Inverse correlation between dollar and
gold has normalized in recent sessions although both gold and dollar had an erratic year in terms of negative correlation. Volume in gold picked up yesterday signaling normal trading activity resumed after holiday season. COMEX gold and silver turnover were 30 percent and 13 percent higher than their 30-day averages, respectively. In the short term, profit-taking will continue to battle with those money managers who sold gold at the end of 2010 and who will now buy back some of those positions.
The main catalyst for gold prices in 2010 was European debt crisis. Greece was bailed out earlier during the year while IMF and EU rescued Ireland from its worsening debt crisis in December with $85 Billion aid package. Rating agencies downgraded Portugal and Spain debt ratings in last week of the year and they could be next in line to ask for help. European debt contagion fears will continue to provide support for precious metal prices until EU comes up with a permanent solution to the problem. In recent days however, Worries over sovereign debt in Europe and tensions between North and South Korea have eased, limiting gold's appeal as a safe-haven asset.
Investors are waiting for Friday’s Non-Farm Payroll report as it will determine dollar’s and gold’s direction for coming sessions. Market is expecting private sector to add 140,000 jobs in December compared to disappointing 39,000 added in previous month. If report falls below analysts’ expectations, gold will benefit due to its safe haven appeal. A better than expected jobs report however, can take some luster away from precious metal.
Yesterday’s Price Action:
Gold price started its Asian session with quiet trading and hovered around its previous close for most part of Asian session. Gold rose to its intraday high of $1417.3 an ounce in later part of Asian trading. Bullion came under selling pressure as markets in Europe started their trading day and made its way towards south. Gold’s losses were deepened as economic data from U.S started filtering in and fell below $1400 level just before U.S market open. Yellow metal remained under selling pressure throughout the session and fell to its intraday low of $1374.7 an ounce during later part of U.S session. Gold closed its day with the loss of 2.5% at $1380.5 an ounce.
Other Metals:
Silver futures for March delivery closed down 162 cents to $29.51 an ounce on Tuesday.
Platinum futures for April delivery fell $39.00 to $1,747.40 an ounce on NYMEX.
Palladium futures for March delivery fell $31.35 to $769.05 an ounce.
N.Y. Copper for March delivery closed down 9 cents $4.37 a pound on Tuesday.
Gold (News and Views):
February Comex gold closed down 44.10 at $1,378.80 an ounce on Tuesday. The London P.M. gold fixing was $1,388.50 on Thursday compared to its previous P.M fixing $1,405.50. The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings fell to 1280.722 tons on December 30 down from 1284.062 on December 29th.
The dollar index, which measures the U.S. currency against a basket of six major currencies, rose 0.26 to 79.44 on Tuesday. Crude Oil for January delivery fell $2.17 to $89.38 on Tuesday on New York Mercantile Exchange. Gold hit its true peak on Jan. 21, 1980, when it rose to $825.50 an ounce. Adjusted for inflation in 1980 dollars, that translates to an all-time record of $2,184.08 an ounce, in 2010 dollars. Holdings in the 15 gold-backed exchange-traded funds monitored by Goldessential.com jointly rose by 9,757,232 ounces, or 303.48 metric tons, in the year ending Dec. 31, analysts reported Tuesday. The yearly increase was 16.54%. Total year-end holdings of the global ETFs stood at a record 2,138.39 metric tons. Still, the pace of investor hoarding slowed compared to 2009, when combined holdings rose 629.52 metric tons, or 52.22%, Goldessential says. The top performance was by the world’s largest bullion-backed ETF, SPDR Gold Trust, in which investors added 147.10 metric tons, or 12.98%, to their holdings, now totaling 1,280.73 tons, analysts said.Factors Affecting Gold Price Yesterday:
Much of the selling pressure in gold Tuesday appeared to largely come from those who had recently entered the market, says John Howlett, division vice president with Mitsubishi International Corp. He described a “mass exodus” from commodities generally, with most showing weakness for the day. “The biggest gainers of recent trading were the biggest losers today,” he says. “That indicates the selling wasn’t from the core bull constituency, but the recent longs. There was supposedly one big order from Europe that got the ball rolling – a big buyer of January 1250 gold puts in substantial amounts. But the same entity was also buying gold outright near the lows.”
“People are shooting first and asking questions later,” said Adam Klopfenstein, senior market strategist with Lind-Waldock in Chicago.
For gold, which advanced 30% in 2010, it was the first “meaningful” selloff in several weeks, said Charles Nedoss, a senior market strategist with Olympus Futures in Chicago.
“We’re seeing [investors] shaking the money tree,” he said. Large-fund liquidation, based on technicals rather than fundamentals, was the story, he added. “The longer-term [upward] trend for gold is still intact. This is just a blip.”
Asset rebalancing may also have played a role in Tuesday’s selloff as funds “fine tune” their weightings during the first half of January, Kitco Metals analyst Jon Nadler wrote in a note to clients.
Independent investor Dennis Gartman viewed the commodities pullback as a healthy correction driven by unwinding of strong year-end buying by hedge funds. He noted that exchange-traded funds were rebalancing after buying a lot of gold last year.
"Do I think that the bull market in gold and crude oil and grain had suddenly ended overnight? No, Not at all.
Can this correction last for a week or two or three? Of course it can, easily," he said.
Gold Future Outlook:
Religare looks for more strength in gold during 2011, with a move toward $1,500 to $1,600. The financial-services company’s largest market is India but it also has a presence around the rest of the globe, with more than 1 million clients. “Precious metals are in a secular uptrend, better than ever before and we believe that we have only seen about half of the full swing so far – the most impulsive phase is yet to come,” Religare Commodities Research says in an outlook report. “Given that the most recent bull market started only in 2001, we have only come through half of the cycle yet.” Thus, gold eventually could hit $2,500, Religare says. “Of course, some deep and hurting corrections will come our way, but they should be taken as buying opportunities if the view is for long term. And we must not forget the fact that it is not gold that appreciates, but paper money that depreciates, i.e. more and more units of paper money will be required to buy an ounce of gold.” Looking ahead just for 2011, Religare says the metal should continue to provide a hedge against the persistent quantitative easing and weakness in fiat currencies. "At some stage, a sustainable economic recovery might challenge the precious metals' rally but until that time, market should remain stable. We expect prices to scale towards the level of $1,500-1,600/ounce (INR 23,000-24,500/10gms) in the international market for the year ahead.”
Gold prices breached but then bounced slightly higher from the 50-day moving average of $1,377 an ounce. Typically gold has moved higher from that area of support. If that level is breached, prices will have to look to the 200-day moving average of $1,265 an ounce.
Any additional selloffs for gold are likely to be tempered by fund buying later in the week due to the lower prices, Lind-Waldock’s Klopfenstein said.
"There's going to be a lot of investor inflows and also asset allocation," argues Phil Streible, senior market strategist at Lind-Waldock. "I think that any significant weakness throughout the course of this week should be met with quite a bit of buying."
Technical analysis (by Jim Wyckoff):
Technically, February gold futures prices closed nearer the session high low today but no serious chart damage occurred. However, the bulls did fade and do not want to see follow-through selling pressure on Wednesday that could produce near-term chart damage. Today's selling pressure does raise the specter of a bearish head-and-shoulders top pattern forming on the daily bar chart, if selling pressure persists in the near term. But right now the gold market bulls still have the overall near-term technical advantage.
An overall five-month-old uptrend is still in place on the daily bar chart for February gold, but now just barely. Bulls' next near-term upside technical objective is to produce a close above psychological resistance at $1,400.00.
Bears' next near-term downside price objective is closing prices below solid technical support at last week's
low of $1,372.70.
First resistance is seen at $1,385.00 and then at $1,393.00.
Support is seen at Tuesday's low of $1,375.00 and then at last week's low of $1,372.70.
Wyckoff's Market Rating: 7.0.
Daily Gold and Silver Expected Range:
Gold: US$1362- $1400
Silver: US$28.80 - $30.20
Chart analysis (by Gary Wagner)
This decade will come to be known as the “Gold Rush” of the twenty first century, well at least the beginning of it! Gold compared to almost all other investments, outperformed brilliantly this decade. From a low of 255 per ounce to 1431, gold returned over 550 % in the past ten years. It took six years for gold to double from 250 to 500. It took only three years for gold to double from 500 to 1000. As we close out this decade we are at 1400. We have also been doubling the angle of accent. We are at a 45 degree climb as we bring in 2011. Can gold double again in 18 months? I do not think it is possible, but it would not be an impossible feat. Chart 1 (below) a monthly gold chart shows how the bullish trend has greatly accelerated. Gold has become the new “Currency of Choice”.
A New Year’s Rally
What could be a better way to end this decade than with a New Year rally. It is my belief that this current rally which began this week is the start of a new bullish run which will take gold to new highs. By March of 2011 gold could be trading as high as 1473, my current target for this wave. Chart 2 below, is a daily candle chart with my Elliot Wave count and most recent projections.
(See Chart Below)
