What?
Gold broke through the important level of $1,525 /oz, which had provided strong support for the price over the past couple of years. What followed can best be described as a “once in a lifetime move” as it lost $213 or almost 14 percent in just two trading days, said Ole Hansen, the head of commodity strategy at Saxo Bank.
Why?
The outlook for inflation remains subdued despite the massive amount of economic stimulus seen these past years and there is also speculation that some members of the US Federal Reserve favour an earlier than planned exit from the quantitative easing programme, which has been bolstering gold.
Then there was the news that Cyprus was prepared to sell its gold reserves to fund its debt payments. Although small in size it could, if implemented, create a precedent for other indebted euro area members and that could really open the flood gates to sell gold.
What next?
For now there are more questions than answers. If investors in Exchange Traded Products continue to scale back investment there will be further pressure to prices. On the other hand, a continued deterioration in economic data together with a visible pick-up in physical demand could eventually increase the demand for gold. These are only some considerations.
What to do?
From a technical traders perspective there could be further weakness to as low as $1,150/oz, but before that support may be provided at $1,300/oz. Following this, gold could eventually settle into a $1,300 to $1,500 range for a prolonged period of time, said Hansen.
Extreme volatility will make intraday trading difficult. Longer term investors who wish to enter the market should probably take steps to do so over the next month. Sellers should be careful on a break above $1425 as it could signal further short covering in the market.
This does not constitute investment advice.
