Gold has grabbed the headlines yesterday falling more than $100 points.The first trigger was the Chicago Mercantile Exchange, which raised margin requirements by 26 per cent yesterday. Rumors were swirling around the markets that the CME was about to hike margin requirements so the sell-off started before the official announcement. When margin requirements rise this makes gold more expensive to hold so there can be a sharp sell-off.
Secondly, gold was looking ripe for profit taking. The precious metal had been cracking fresh highs in recent weeks and directional indicators like the relative strength index were pointing to gold being in oversold territory. Added to this, earlier this week the gold Exchange Traded Funds (ETFs) exceeded the market capitalization of the S&P 500 ETF for the first time. When market sentiment is completely in one direction the trade starts to look crowded and that is when sharp reversals can occur.
Fundamental factors driving gold:
An overly indebted West, the Eurozone sovereign crisis, the US debt ceiling and the prospect of more quantitative easing from the Fed helped to fuel gold's rise in recent weeks. Added to this, real interest rates – when adjusted for inflation – are deeply negative in Europe, the US and the UK. Since gold doesn't yield anything, it can do well when interest rates are low since it is a traditional store of value. Also, since the start of the month there have been growing fears about the banking sector. The European banks sold off sharply due to 1, fears about their exposure to sovereign debt and 2, capital buffers, which are lower than they are in the US.
But while the West remains highly indebted, fears of a banking collapse have been toned down. Added to this speculation is mounting that the Fed won't actually announce QE3 on Friday. The growth outlook is still too unclear and inflation is much higher than it was last year when QE2 was announced, which reduces the need for more stimuli. Thus, gold's attraction as a currency substitute for the weak dollar is no longer justified. As a result, as gold sold off today the dollar rose.
After falling $129 it has found support around $1,725. If it breaks below here then we may see further falls towards the $1,630 level – the 10-day moving average on weekly.
The gold trade is not for the faint hearted. It's hard to make a call right now and there is an equal chance it could fall or rise from here. Ultimately the direction of gold will be determined by Bernanke's Jackson Hole speech on Friday. More QE and the gold bugs will be happy, no more QE and it may take another tumble.
By
M.Zohaib Gadit
Secondly, gold was looking ripe for profit taking. The precious metal had been cracking fresh highs in recent weeks and directional indicators like the relative strength index were pointing to gold being in oversold territory. Added to this, earlier this week the gold Exchange Traded Funds (ETFs) exceeded the market capitalization of the S&P 500 ETF for the first time. When market sentiment is completely in one direction the trade starts to look crowded and that is when sharp reversals can occur.
Fundamental factors driving gold:
An overly indebted West, the Eurozone sovereign crisis, the US debt ceiling and the prospect of more quantitative easing from the Fed helped to fuel gold's rise in recent weeks. Added to this, real interest rates – when adjusted for inflation – are deeply negative in Europe, the US and the UK. Since gold doesn't yield anything, it can do well when interest rates are low since it is a traditional store of value. Also, since the start of the month there have been growing fears about the banking sector. The European banks sold off sharply due to 1, fears about their exposure to sovereign debt and 2, capital buffers, which are lower than they are in the US.
But while the West remains highly indebted, fears of a banking collapse have been toned down. Added to this speculation is mounting that the Fed won't actually announce QE3 on Friday. The growth outlook is still too unclear and inflation is much higher than it was last year when QE2 was announced, which reduces the need for more stimuli. Thus, gold's attraction as a currency substitute for the weak dollar is no longer justified. As a result, as gold sold off today the dollar rose.
After falling $129 it has found support around $1,725. If it breaks below here then we may see further falls towards the $1,630 level – the 10-day moving average on weekly.
The gold trade is not for the faint hearted. It's hard to make a call right now and there is an equal chance it could fall or rise from here. Ultimately the direction of gold will be determined by Bernanke's Jackson Hole speech on Friday. More QE and the gold bugs will be happy, no more QE and it may take another tumble.
By
M.Zohaib Gadit
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