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Gold Falls Below Key $1,180 Support As Stocks, Dollar Strengthen; Sell Stops Hit

By Allen Sykora Kitco News
Friday October 31, 2014 9:11 AM

Editor's Note: Updating earlier story with additional comments from analysts

(Kitco News) -Gold fell below a key chart-support level that traders have talked about for weeks – a triple bottom around $1,180 an ounce.

The December gold futures on the Comex division of the New York Mercantile Exchange tumbled as far as $1,160.50 an ounce Friday, their lowest level in four years on a futures continuation chart. As of 9:35 a.m. EDT, the contract was down $34.30 to $1,164.30.

Silver also fell to a four-year low. December silver was down 49.5 cents to $15.925 and bottomed at $15.635.

For gold, the $1,180 level was a big focus for technically oriented traders since this was the general area where the market held in June and December of 2013 and then again earlier this month. Each time, gold bounced, until Friday.

As the market fell below this, sell stops were triggered, said Afshin Nabavi, head of trading with MKS (Switzerland) SA. These are pre-placed orders activated when certain chart points are hit.

“It happened overnight when liquidity is not the most active,” Nabavi added.

In addition to “cascading sell stops,” some selling in the futures market is likely also due to margin calls, said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures.

UBS described gold as “sitting in a precarious position” now.

“The break of key $1,180 support this morning is likely going to unnerve investors,” the bank said in a research note. “This level has been tested and has held three times since 2013– a close below could damage sentiment considerably.”

The weakness in large part has been triggered by moves in currency markets this week, particularly after central bank meetings in the U.S. and Japan, observers said. The spot U.S. dollar index was up 0.821 point to 86.968 and peaked at 87.015, its strongest level since 2010. Gold often moves inversely to the U.S. currency.

“People are looking at the dollar more than anything else and are looking at equities holding on,” said Charles Nedoss, senior market strategist with LaSalle Futures Group. In fact, he added, some foreign money may be making its way into the strong U.S. stock market, adding to the recent gains in the dollar.

The weakness in gold began this week after a Wednesday statement from the U.S. Federal Open Market Committee. Policy-makers said they were ending the bond-buying program, known as quantitative easing, as expected. Markets collectively were surprised, however, that the Fed was more upbeat on the labor market, which was construed hawkishly and moved ahead market expectations for an eventual hike in the federal funds rate next year. This was followed by a stronger-than-forecast rise of 3.5% in U.S. third-quarter gross domestic product Thursday.

Then overnight, the Bank of Japan surprised markets with massive economic stimulus. The BOJ moved to accelerate purchases of Japanese government bonds to an annual pace of 80 trillion yen. Policy-makers also said they would increase purchases of exchange-traded funds and real-estate investment trusts and buy longer-dated debt.

This resulted in sharp gains for the U.S. dollar to a nearly seven-year high against the Japanese yen. Also, Tokyo’s Nikkei index gained 4.83% to close at its highest level in nearly seven years. In the U.S., the Dow Jones Industrial Average was up by around 150 points within minutes after the open on Wall Street.

While most industrial metals are higher, gold is weaker “as the need for safe haven is eliminated by traders who are happy to add equities and other risky assets to their portfolios,” said Janet Mirasola, managing director for metals with Wells Fargo Securities.

Traders will watch to see how much physical demand emerges at lower price levels. So far, this has been “OK, but it is not great,” said Nabavi. Potential buyers may watch to see how much further gold falls before stepping back into the market.

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Two prevailing factors that have hurt gold this year are low investor participation and low convictions, UBS said. For much of 2014, gold was range-bound.

“The downward pressure on gold, particularly in the last two days, is amplified by the lack of liquidity as investors hesitate to get involved,” UBS said.

Nabavi said the area around $1,175 to $1,180 may now act as near-term chart resistance. He put the next support around $1,150, with the next major psychological level of $1,100.

By Allen Sykora of Kitco News; asykora@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.
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