Editor's note: Catch the Latest Happenings with Kitco Video News!

Gold Tumbles In Wake Of Fed; Stops Triggered; More Weakness Seen

By Allen Sykora and Debbie Carlson of Kitco News
Thursday June 20, 2013 10:15 AM

(Kitco News) - Gold prices fell to their lowest level in more than 2 ½ years Thursday as markets continued to digest remarks from Federal Reserve Chairman Ben Bernanke, leaving analysts and traders looking for at least a short-term bounce, but also fearing future weakness may be in store.

Technically oriented selling accelerated the decline as prices fell through key chart levels that triggered stop-loss selling.

The move was fueled as traders reacted to remarks from Bernanke Wednesday suggesting that the Federal Reserve may be able to start tapering its asset purchases, known as quantitative easing, sometime this year and potentially could end them by the middle of next year, assuming the U.S. economy continues to improve, analysts said. The Fed chairman emphasized more than once that any actual steps would hinge on future economic data, but markets nevertheless zeroed in on the potential for tapering.

“Investor sentiment seems to believe QE (third round of quantitative easing) is coming off of the table,” said Sean Lusk, director of commercial hedging with Walsh Trading. “Investors are taking profits.”

As of 9:45 a.m. EDT, August gold futures were down $72.50, or 5.3%, to $1,301.50 an ounce on the Comex division of the New York Mercantile Exchange. On a spot continuation chart, gold bottomed at $1,285 overnight, its weakest level since September 2010. All other precious and base metals also were sharply lower by between 1.6% and 7.6%.

Traders said volume was heavy. Losses during Bernanke’s press conference were modest, but the move picked up momentum overnight during Asia-Pacific and London trading.

“I think a combination of the strong dollar rally and the heightened volatility in credit markets is behind the move. Bears are definitely in control here,” said Jordan Eliseo, chief economist of Sydney-based ABC Bullion.

The euro was down to $1.3188 compared to $1.3402 Wednesday just ahead of the FOMC statement. Dollar strength tends to hurt gold by making it and other commodities more expensive in other currencies, plus reduces the demand for the metal as a hedge against dollar weakness.

The focus of gold and other markets is clearly on prospects for QE tapering, observers said. U.S. equities are weaker and the 10-year Treasury yield has been as high as 2.425%, its most muscular level since 2011.

“That (QE) has really been a key driver of gold certainly in the last three, four years since we had QE1, QE2 and QE3,” said Robin Bhar, metals analyst with Societe Generale. In past years, quantitative easing gold boosted. “So any reversal…clearly has to be negative,” Bhar said.

Stop-loss selling was triggered when the market fell through the prior longtime lows in the low $1,320 area, then again below $1,300, said Afshin Nabavi, head of trading with MKS (Switzerland) SA.

Bill O’Neill, principal with LOGIC Advisors, said prior to Wednesday’s break that physical demand was slowing from the unprecedented pace seen after the $200-plus fall in April.

He said he was recently in Hong Kong speaking to gold dealers there. “In April they couldn’t keep enough gold in stock, but when I talked to them the other day, they said there’s been a definite slowing,” O’Neill said. He also noted the efforts by India’s government and central bank to cool its citizens’ demand for gold has had an impact.

Alex Thorndike, senior trader for precious metals and foreign exchange at MKS Capital, pointed out that holdings in the largest gold exchange-traded fund, SPDR Gold Shares, now sits below 1,000 metric tons, the lowest since 2009. It was around 1,350 as 2012 wound down.

Analysts, Traders Fear More Weakness

Most observers see potential for further weakness in the wake of the Fed news.

Nabavi said he looks for some kind of short-term correction upward after gold fell so fast, adding that there already has been a pick-up in physical demand in the Far East at lower prices. “But overall, I think the market looks a bit heavy,” he said. He looks for gold to now move into a $1,250-$1,320 range for a while.

“I expect to see a little more pressure to the downside,” Lusk said, but adding that he also expects to see a pick-up in physical demand. “But on a technical basis, we could have further to fall -- $1,250 to $1,200 is probably a level to watch.”

Technically, Lusk said, it could hurt gold further if the metal closes below the psychological $1,300 area.

Future economic data will be the key, as always, Lusk added. Bernanke emphasized more than once during his press conference that any Fed tapering will hinge on the flow of economic data. In particular, if the next jobs report due out in early July was to be weak, “that could probably stop the bleeding,” Lusk said.

Global Hunter Securities looks for more gold weakness in the immediate future but then a recovery since monetary policy still remains accommodative.

“The key statement was that the ‘downside’ threat to the U.S. economy has been reduced,” said Jeffrey Wright, managing director and senior research analyst with the firm. “The end result for gold will most likely be weaker gold markets in the immediate future followed by a gradual recovery through the end of 2013. Even with a path toward curtailing QE, the FOMC remains in an accommodating monetary policy well into 2014. As a result, we believe gold is currently range-bound (mainly) between $1,300-$1,500.

Bhar looks for more weakness in gold, although he said some consolidation may set in. He described the metal’s technical-chart picture as bearish.

“Gold could come back to $1,265, then look to consolidate and maybe have another rally to the $1,350 level and possibly back up to $1,400,” he said. “But we see gold over the longer term – we’re talking maybe a couple of years – coming back down to $1,000…depending on the pace of liquidation out of the ETFs and futures markets.”

Another downside risk, Bhar suggested, would be if gold-mining companies resume a hedging program that they previously gave up so their share prices would be fully exposed to the upside in gold prices over the last decade. “Clearly, at these gold prices, the mining companies are under pressure. We think they have no choice but to start hedging again,” he said.

Further, equity-market weakness could mean pressure on gold for the near term at least, if investors have to liquidate positions in markets such as precious metals to raise cash for margin calls in stocks, Bhar said.

Swiss bank UBS Thursday lowered its gold forecast, now listing a one-month target of $1,250, compared to $1,425 previously. However, the bank looks for $1,350 in three months, down from $1,500 previously.

By Allen Sykora and Debbie Carlson of Kitco News; asykora@kitco.com and dcarlson@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y
 

Interactive Chart