Gold had a torrid September and suffered further losses last week of 2.2%.
The move lower in September was technically driven as there was no negative headline data, obvious reasons for price falls or indeed evidence of physical gold selling. Most of the selling was on the COMEX and gold remained firm in Asian trading throughout the month.
Indeed, the mood music for gold is quite positive - especially the appalling western relations with Russia, Middle Eastern tensions and attendant geopolitical risk.
One plausible factor for gold’s weakness is the ever increasing, “irrationally exuberant” appetite for the dollar globally which may be impacting gold.
Despite poor economic data out of the U.S. in recent days, the dollar has continued to eke out gains.
Poor data has not led to the bounce in gold that one would have expected. The permanently levitating stock markets have seen weakness and this may be a prelude to much larger losses.
There is increasing evidence that the U.S. consumer is struggling and close to being tapped out. Indeed, housing data has been poor recently, suggesting the recent housing boom could be on its last legs. The latter scenario is likely the case which will prove bullish for gold in the long term.
Technically, gold is vulnerable to a further fall to test its bottom from July, 2010, at $1,161/oz. This is particularly the case in the very short term, in other words, this week. A breach of the $1,161/oz level could result in a rapid fall to test $1,110/oz and the long term support at $1,000/oz.
Silver is also vulnerable after breaking below key resistance. Technical support is at $15/oz.
Therefore, short term weakness is a real risk and those considering reducing allocations should sell in the short term. At the same time, it is important to remember that with market manipulations of today, technical analysis is not as useful a tool as heretofore.
The long term fundamentals remain very sound and those who are patient and focus on gold’s strong fundamentals and still robust global demand, especially from China and India, will be rewarded again.