Gold Glitter Gone – 5 Reasons for Gold Bugs to Hide

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The price of gold has also been twisted by Bernanke and doesn’t seem to show signs of recovery. It’s not only the absence of QE3 that is driving the price down. Here are 5 reasons why gold is going down long term.

In addition to fundamentals, also the technicals point lower. Gold price has lost uptrend support but still has room for falls until it reaches critical support at the gap line.

Gold Fundamental Weakness

  1. No QE: The common explanation is that without more QE or hints of QE in the Operation Twist announcement, there is no further debasement of paper money and therefore less desire for the precious metal that also was the standard for currencies.
  2. Asian slowdown: Gold enjoyed high demand from Asia and the Middle East, which diversified their investments (from industrial goods and oil). China and other Asian countries are slowing down, and oil prices are falling. This weakens demand for gold for both jewelry and investment / speculation.
  3. Other metals: Prices of other metals have taken a hit: The most notable one is copper.This follows the previous point regarding demand. While industrial metals and precious metals are used for different purposes, they still are correlated.
  4. Yield: Investments in currencies yield interest rate on cash or interest rate from bond yields. While these are extremely low in the US and in many other “safe” places, this yield still exists there and doesn’t exist on gold. With gold, you only enjoy the rising price of this investment, or speculation.
  5. European banks buy gold: These banks were wrong to sell gold in the 90s, and now they are buying gold. That’s an anecdotal sign, but still worth noting.

Gold Technical Weakness

Gold Prices September 2011 Chart

Gold Prices Chart - Click to Enlarge

Looking at the daily chart, we can see a double top at around $1920. The failure to break this line towards the round number of $2000 is one reason for more falls.

Another one is the break of uptrend support. The recent ride in prices was quite unhealthy, and the downfall is sharp.

On the other hand, this could still be consolidation, although quite painful. The critical line to watch is the gap line at $1682 seen at the end of July. This is an important line, and there still is quite a lot of room before this line is tackled.

Further reading:

What do you think? Is the price of gold consolidating or has it turned around?

I don’t frequently cover gold but rather focus on currencies. Gold is not a currency but gold, oil, stocks and currencies are all correlated.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

2 Comments

  1. These are all very valid reasons for the current drop in prices.

    However what has changed fundamentally besides the Fed turning off the tap? QE2 ended months ago…

    The world is still in debt up to its eyeballs, jobs are still not bring created, EU is on brink of collapse or major restructure…

    Nothings changed and credit rating agencies are a farce… The minute the real problems present themselves where is everyone gonna run?

    Why gold of course… CHF Is no longer credible… Dollar is producing zero yield…

    Gold can keep dropping, I will be happy to pay less for the only true money available on the planet…

    China will be happy to pay less as well…

  2. Pingback: Is It All Over for Gold?