Gold prices continue to break down, falling for a fifth consecutive day on Tuesday after Chairman Ben Bernanke caused a massive sell-off last week by failing to mention further QE is on its way. The yellow metal broke below its 200-day moving average despite ultra-loose monetary policy.
Interestingly enough, market players remain bullish on the yellow metal, according to UBS’ Edel Tully. She adds:
While sentiment for the yellow metal was generally positive, positioning is light, especially within the macro community. This is ultimately positive for gold.
Prices, though, continue to fall. Gold for April delivery slid 1.8% to $1,674.00 by 1:50 PM in New York, breaking through key resistance level $1,676, the 200-day moving average. Gold fell in 7 of the last 8 trading sessions; on the flip side, the U.S. dollar has been on the uptrend gaining about 2% since February 27.
Gold, like most risk assets, has been trading in tandem with expectations of further monetary easing. Tully explains that most of their clients said they expect further QE from the Fed in the near-future, as recent positive economic data appears unsustainable over the medium-run.
Beyond the Fed, central banks from Japan, England, and the ECB have engaged in some form of quantitative easing, while major emerging market central banks in countries like Brazil and China are expected to unleash aggressive counter-cyclical policies to counteract a slowing global economy. These should all be bullish signs.
Furthermore, gold should be benefitting from the recent spike in oil prices. Tully notes that UBS’ analysts understand the recent rise in crude oil as a dual phenomenon: on the one hand, the specter of an extended Iran-Israel conflict should put pressure on supplies, while ultra-loose monetary policy and improving economic indicators should support rising global demand. From Tully’s latest note:
For gold, this means that the potential benefits of more expensive oil prices feeding into higher inflation expectations are being diluted by a more constructive economic outlook. Should economic data continue to hold up, the gold:oil correlation could remain low or even turn negative. The upside risk, on the other hand, is if tensions in the Middle East escalate over the coming months and push oil prices significantly higher. This would give rise to elevated levels of uncertainty and the threat that poses to global growth would probably benefit gold, plus a geopolitical risk premium.
So why are gold prices trending lower?
One important factor is caution. Investors are being very strategic in 2012 after a difficult 2011, Tully argues, “with interest focused instead on short-term trading objectives” and profit taking.
The other part of the equation is momentum. Gold prices have been on a sustained downtrend every since Bernanke’s QE3-omission caused one of the biggest sell-offs in recent memory. While macro players indicate they are bullish the yellow metal, they seem to be “engaged in a waiting game, with no one willing to take the first step.” Tully expects gold prices to consolidate around the lower $1,700s as a price floor forms that helps build investor confidence once again.
It’s not just physical gold that took the hit these days. Major gold miners like Barrick Gold, Newmont Mining, and Goldcorp are all in negative territory, while silver prices have also collapsed.
On Monday, Dallas Fed President Richard Fisher gave an unusually blunt speech in which he accused Wall Street of being “hooked on monetary morphine.” A non-voting member of the FOMC, Fisher told investors they shouldn’t expect another round QE unless the economy takes a serious turn for the worse. Gold seems to be trading along with risk assets these days, and has thus broken down along with everything else.
Market players continue to exude positive sentiment, but that has yet to feed into higher gold prices.