Can Gold Recover?
Clif Droke | Sep 16, 2014 03:35PM ET
Gold recently fell to its lowest level in seven-and-a-half months as the dollar rose to a 14-month high. Easing tensions in Ukraine and the Middle East also acted as a drag on gold and Silver prices. Investors have been asking the obvious question as to whether gold can recover from here and if a bottom of at least short-term duration is imminent?
Dollar strength has been especially hard on the precious metals of late. Commodity prices in general have been beaten up in recent weeks by the surging U.S. dollar index, as sagging gold and silver prices attest.
Both the U.S. dollar and commodity prices in general are largely determined by the relative strength of the U.S. economy. With the economic recovery now in its fifth year, investors (especially foreign ones) are increasingly attracted to the U.S. as a safe haven. Economic weakness in the euro zone has galvanized a flow of “hot” foreign money to the U.S. dollar, further bolstering the dollar while at the same time depressing commodity prices.
Along with a strong dollar, another reason for the recent weakness in the gold ETFs has been a curious plunge in the level of short interest. For instance, the iShares COMEX Gold Trust (NYSE:IAU) was the target of a large decline in short interest during August despite a weak price trend.
As of August 15, IAU short interest totaled 1.19 million shares, which represents a decline of 48 percent from the July 31 total of 2.29 million shares, according to Stock Ratings Network.com. Based on an average trading volume of 2.19 million shares, the days-to-cover ratio is currently 0.6 days.
Meanwhile ETF holdings for gold have continued to shrink with preliminary data for August revealing an outflow of 11 tons and flows in September have started the month off on a negative note at nine tons.
Earlier we examined the MarketVectors TR Russia (NYSE:RSX) for signs of a technical breakdown in Russia’s stock market. A plunge in the RSX below the low from early August would suggest turmoil ahead for Russia on the Ukraine front, which in turn would be a major catalyst for gold bulls to charge. Lately, however, RSX has remained well above the August bottom as the cease-fire talk between Ukraine and Russia has gained momentum. As you can see in the following chart, RSX is now well above its August low of 23.00 and has bought itself at least a temporary reprieve. In turn, gold and silver have suffered as the safe haven trade unwinds.
Get The News You Want
More than perhaps any other factor, gold has been at the mercy of the macro environment, as Barclays (LONDON:BARC) recently observed. News from around the world hasn’t done the gold price any favors lately as the yellow metal continues to search for a much-needed fear catalyst.
The December gold futures price has under-extended from the 30-day moving average by nearly 4 percent as of last week. This is significant since a long-term research history of gold shows that whenever price extends by approximately 4 percent +/- above or below the 30-day MA, a technical reversal usually follows shortly thereafter. Gold is technically oversold on a short-term basis and is therefore vulnerable to a relief rally in the upcoming days. The extent and magnitude of the next relief rally, however, will depend in large measure on either a large short interest (which apparently doesn’t exist right now) or else buying interest among institutions and hedge funds looking for bargains.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.