Jul. 13, 2015 4:00 AM ET
Summary
- Gold underperforms in times of economic crises, down 3% for the year.
- Demand failing to pick up as investors rush towards US dollar and equities.
- Technicals suggest that price may head down to $1100-$1130.
Over the past year, we have had several global events which would have usually contributed to a rise in the price of gold. However, the bullion markets have rejected all of these events, including the recent Greece crisis, the geopolitical tensions, and many others, as insignificant factors.
This has prompted every gold bull - prospective or current - to think, "What will cause an uptick in its price?"
Reasons why gold has failed to climb
There are several reasons contributing to the underperformance of gold.
Greece Crisis Is Nothing - Mayhem is usually the world which gets the gold bulls ticking, however, this time the market looks in no mood to entertain the repetitive scenarios in the ongoing Greece drama. The bullion market has probably priced in that even if Greece exits (I believe the chance of a Grexit is very less), it won't cause a major disruption in the global financial market. This is, in a way, good news for the world economy and also suggests that the fears of the impact of a Grexit on the global financial system are blown out of proportion.
According to the latest development reported byThe Washington Post, the Greek government has sought 50 billion Euros over the next 3 years from the creditors in a last-ditch effort to retain its spot in the Eurozone. In exchange, the Tsipras-led government has offered to carry out painful spending cuts and hike taxes which total to significantly more than the previous commitments.
Did Greece deceive its people on this? Maybe yes. Did Greece bluff the gold market? Definitely Not!
The Ever-eluding US Fed Rate Hike - The Chair of the US Fed, Janet Yellen said on Friday that the world economy should be prepared for a rise in the interest rates later in 2015. Earlier, the market was expecting the same in Fed's June policy which but the action later shifted to the September meeting. And now, even September has been ruled out!
Investors are, however, sure that a rate hike is coming, sooner or later, and hence, they are more attracted towards the greenback and shunning gold as a safe-haven investment.
Equities Have Become Attractive - There is no doubt that global financial markets are in a risk-on mode which makes equities as an investment class far more rewarding. Or in better terms, "global markets are much less fearful now."
Nasdaq is up ~5%, DAX is up >10% and Hang Seng is up ~4% YTD.
Equity investors are now on the lookout to buy good stocks on dips instead of investing the same dollars in an "unattractive metal" such as gold.
The China Story - I believe that Gold is mostly sentiment-driven. Many would have expected the slowdown in the world's biggest economy China (on PPP valuation) to cause a stir and buoy the price of the yellow metal. Gold, has instead, shrugged off these fears completely, indicating that the slowdown is not as acute as was earlier thought.
The recent rout in the Chinese stock market was also seen as a precursor to the good times for gold bulls. However, the reverse has happened. According to a recent WSJ report, "investors in China have resorted to heavy gold-selling in order to raise cash in the aftermath of the stock market collapse, further depressing the value."
Lower Oil Prices - Oil prices are still significantly lower now than in earlier half of 2014, and there are heightened expectations that oil will remain lower for the next one year.
The International Energy Agency sees lower oil prices as the world remains massively oversupplied.
It forecasts that the prices need to trend lower to curb excess supplies or else oil will fail to rally.
Market Action - According to the latest data from the US CFTC, US futures market has seen a cut of 8% in long positions in Managed Money while short interest advanced by 17 % in the week to June 30.
But Has Gold Lost Its Sheen For Ever?
Well, I wouldn't dare go that far to say that gold will never become attractive again. It is a metal which has wide applications, and it will stage a comeback sooner or later, or when the market realizes that all other asset classes have been highly overbought and it's time to book profits in those and invest in an undervalued asset class.
Please take a look at the Weekly Gold Spot price chart below. According to the chart below, gold has been trading in a downward range since early 2014. But the latest price action suggests formation of a bearish Head and Shoulders pattern (marked in the chart).
(click to enlarge)
Image: FXStreet
As can be seen, gold is at a crucial point at $1160, below which it may witness a strong selling pressure. The downside target for this trade would be $1100-$1130.
It must also be noted that since early 2014, the Money Flow Index has also been in a downward pattern, according to which, the next support would be a sub-20 level. Levels below 20 signify extremely oversold conditions and may attract huge inflow in gold ETFs. The physical demand for gold is also expected to pick up near those levels, at least in China and India which have emerged to be the biggest consumers of the yellow metal.
The Relative Strength Index value of 41.8361 is also at the neckline of a small Head and Shoulders Pattern. A break in the underlying strength reading could be ominous for the bulls.
Why am I stressing over the small H&S patterns? Because, such patterns are completed most of the time. This suggests that investors can postpone their purchase program and wait for cheaper, low-risk levels to enter the bullion market.
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