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Gold: Don’t Catch the Falling Knife
Aspire, Personal Finance | 29 July 2015
By: Lim Si Jie
Articles (169) Profile

Source: TradingView

Gold marked its 10th straight day of losses last Wednesday, in the longest losing streak for the precious metal in almost 20 years. While gold investors are hoping that the slump is over, many analysts and traders are doubtful, claiming that the collapse isn’t over yet.

Investors Dump Gold for US Dollar

Climbing interest rates tend to reduce the attraction of non-yielding commodities such as gold, with analysts stating that the next key milestone will be US$1,044 an ounce, its 2010 low.

There are even more bearish sentiments on the Street. Goldman Sachs forecasts that downward pressures affecting all commodity markets could force gold prices down to below US$1,000 an ounce. ABN Amro Bank and Societe Generale also believe that gold will approach this symbolic threshold by December.

Higher US interest rates continue to support an environment where “gold yields nothing” for the investor. Cash is now king in the commodity world, with most investors preferring to hold on to the rising US dollar rather than gold. The dollar index is up 8 percent year-to-date. Since gold is quoted in dollars, it has an inverse correlation with the dollar, falling every time the dollar rises. With inflation low and the dollar strong, gold will stay range-bound until there are signs of inflation.

China’s Loss of Appetite for Gold

Other than the rising interest rates, China is another source of gold-sapping news. Data shows that China, which has intentions on making its own Renminbi a reserve currency, has not been buying up gold in the quantities many have anticipated.

China’s gold reserves were up 57 per cent since its last reserves figures adjustment more than six years ago, but this was about half of what was expected. As a percentage of its total reserves, China’s gold holdings were actually in decline. One of the key assumptions underpinning the market in recent years was Chinese acquisitiveness.

Physical demand for gold in China was down 9 percent while worldwide demand for gold coins and gold bars was down 17 percent this year.

Greek U-Turn

Greece has also stepped back from the abyss – at least for now. The global economy seems to be trundling along and Western countries are seeing a return to growth. The apocalypse predicted by many, which would have scared investors into parking their money in safe assets such as gold, has not happened.

Technical Analysis

Many trades are now executed via algorithmic systems, with software designed to buy or sell when a price hits a given high or low level to manage risk in big portfolios. Gold has reached the sort of low where the “stop-loss” trades kick in, further fuelling a possible sell-off.

Contrarians: Gold Will Rebound In No Time

While there certainly seems to be a consensus that gold is not going to rebound strongly any time soon, there are always contrary opinions in the market. One such contrarian is KKM Financial’s Jeff Kilburg, who said that the large selloff could prime the market for minor bounce-back.

Kilburg thinks that there is no rhyme or reason to why the selling is so hard, and he believes that Gold will turn around for a little bit of a relief rally.

Silver Lining

Source: TradingView

While Gold continues to collapse, technical analyst Todd Gordon believes that its “close relative”, silver, is unlikely to suffer the same fate. Gordon said that Silver has more of an industrial use than gold, and therefore, should fare better than gold as it serves as an industrial metal producing a closer relationship to the direction of the stock market.

Gordon predicts that the double bottom at US$14 level could see silver rally to US$15.50.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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