Gold continues to lose its shine

For gold investors and gold bugs, the current malaise in the price of gold is both relentless and remorseless with each minor rally promptly engulfed by a wave of heavy selling. As someone wrote a few weeks ago, gold bugs consider the market to be functioning correctly when the price of gold is rising, and incorrectly when the market is falling. An odd view perhaps, but one which is understandable. Gold, by its very nature, is considered a precious metal, and with a limited supply ‘should’ be one which continuously rises in price. In other words, it is one of those commodities that has an inbuilt bullish bias from an emotional perspective. But, as always emotions, whether trading or investing are dangerous, and none more so than when considering gold, either as an investor or as a speculator.

Over the years I have received many emails from investors who do not understand why the price of gold is falling, and in turn ask me when I believe the tide may turn, and the problem is always the same. Generally their purchase was based on market hype in the media that the price of gold was going to the moon, and a sure fire winner for the longer term. The point at which such headlines appear, we can be certain of one thing – the market operators are preparing for a selling climax of epic proportions, as evidenced in the Shanghai composite over the last few months. Eager investors jump in and fearful of missing out, and sometimes aided and abetted by supportive comments from the government. The rest is history and another bubble bursts!

From a trading perspective it’s a question of speculating on what we see and not what we think, and from a technical perspective, the longer term outlook for the precious metal continues to remain firmly bearish, and for evidence of this we need look no further than the weekly chart for gold. The key move here was two weeks ago with the price moving firmly below the platform of support in the $1174 per ounce area, as demoted with the blue dotted line. This is a region that has seen accumulation in the past, and hence acted as support, but with this now breached, offers strong resistance overhead. Indeed this level was tested last week with the current selling pressure confirmed by the substantial increase in volume in this timeframe. So far this week, the price of gold has continued to move firmly lower with the precious metal trading at $1154 per ounce at the time of writing with the next key level on the horizon at $1140 per ounce. Once this level is breached, then we are almost certain to see a move through the $1100 per ounce region and on down to $1040 per ounce in the longer term where further potential support awaits.

What is perhaps most interesting, but most depressing for gold investors, is that even the recent volatility in the markets owing to the situation in Greece and the euro, has failed to drive gold prices higher as a flight to safety. In addition, should we see further US dollar strength this too is likely to drive gold lower, and with inflation but a dim and distant prospect, the forces of technical and fundamental analysis are aligning to confirm the current trend. As always, it will be volume which will reveal the consequent buying climax and longer term reversal, but we are some time off this happy day for investors and gold bugs. Until then for speculative traders, it’s simply another market to trade without emotion!

By Anna Coulling

Charts are from NinjaTrader and the trading indicators from Quantum Trading.