Gold Set to Test $1,000 Support Level

SPDR Gold Shares (GLD) Plunging 7.51% over 3 Months

Reasons why Gold is being impacted so Negatively

One of the hotbed issues that had investors deeply concerned was the Greek crisis vis-à-vis Grexit talks, and Debt/GDP issues. The precarious predicament in Greece had the world balancing on a knife-edge. Fears that Greek Prime Minister Alexis Tsipras and his far-left Syriza Party would not agree to a bailout on troika conditions sent many investors into a tailspin. Concerns of a Grexit and the implications on Eurozone stability led to deeper investments in safe-haven assets like gold. However, as a third bailout and associated austerity measures were agreed to, fears abated and stability returned to the markets. Demand for gold is inversely related to the stability of the markets. As a result, gold demand plunged when equities surged.

Trading is largely run along automated lines nowadays. In other words, key support and resistance levels are factored into trading algorithms. Stop loss and take profit orders are pre-programmed and when commodities like gold hit certain points, orders are automatically executed. Since these are done on a mass scale, the impact of sharp price declines is instantaneous across the board. These technical trading techniques are employed by brokerages and fund managers to limit losses to their clients’ portfolios. Accelerated sell-offs are taking place as the gold price moves lower and the volume of sell-offs is increasing too. Ironically, these automated technical trades have only assisted in ramping up the sell-offs and increasing losses for traders.

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A cursory analysis of the gradual decline of gold in 2015 would be incomplete without an examination of the broader impact of China on global markets. The recent meltdown of Chinese equities – to the tune of 8.5% recently – saw trillions of dollars wiped off the Chinese stock exchange. While this is a significant source of concern to global investors it has had a devastating impact on sentiment. Commodities prices have been heavily impacted by the perceived weakness in Chinese equities. Copper, gold, oil and others have suffered with slower Chinese growth and the ongoing weakness in equities. Since China remains the world’s largest consumer of many commodities such as copper, wheat, oil and so forth and any decrease in demand is going to sour commodities prices. Despite the fact that Chinese gold reserves have increased by 57%, the spike is less than what was anticipated. However, any remarkable performance in the Chinese economy would likely shift gold demand and result in changing expectations relating to the future direction of the price of gold.

US Dollar Index Showing USD Strength

Arguably the most important factor weighing on the price of gold is U.S interest rates. With the Fed determined to raise interest rates by September 2015, it appears all but certain that the greenback will strengthen against a basket of currencies. Since the USD is the world’s reserve currency, and the price of gold is quoted in USD, this will have a direct impact on the gold price. As the USD strengthens, so gold demand decreases. This inverse relationship will hurt U.S. gold stocks like SPDR Gold Shares (GLD), Barrick Gold Corporation (NYSE:ABX) which is down 45.81% over the past 3-month period, Goldcorp Inc (NYSE:GG) which is down 32.02% over the past 3-month period and many others. Demand for gold shares on the NYSE and other bourses will remain muted as long as the factors undermining the gold price remain intact.

The U.S. interest rate is likely to rise by 0.25% and this will make it less attractive to gold investors. Since gold itself does not provide any source of income to investors, and it doesn’t provide a dividend there is a real cost to holding gold as opposed to an interest-bearing asset. When the interest rate is low and stock markets are performing poorly, it pays to be invested in gold. But under current market conditions, there is more to be gained by divesting. The opportunity cost of holding gold under such conditions becomes too much and interest-bearing investments take precedence. USD strength weighs heavily on investor perceptions. As the USD strengthens, investors tend to re-assess the price of the precious metal in real terms.

Will the Gold Price Surge After the Fall?

The gold price is predicated on multiple factors, not least of which are the strength of the USD, interest rates, the status of global equities markets and more. Prior to the global meltdown in commodity prices, gold was largely touted to hit the $5,000 mark in the future. While that figure seems nothing more than the ramblings of misguided analysts, it was once believed to be true. Nowadays, we can expect a far more conservative estimation of where the gold price will go. The next key support level is the $1,000 mark and after that, $800 an ounce may well be tested. Precisely how far the gold price will fall, and the pace of the slide is uncertain. It should be remembered that gold has remained an inflation-proof and recession proof investment over the years. Between 2003 and 2013 the price of gold spiked after Britain’s Gordon Brown sold off the country’s reserves. These types of price movements can happen at a moment’s notice.

Inverse Relationship between Gold Price and USD Strength

It should be remembered that 2008 Fed Governor, Ben Bernanke began a monetary stimulus policy which resulted in US dollars flooding global markets. This decreased dollar demand and dollar strength. As a result, investors were sent scrambling for gold. But things have changed since 2008 and US equities markets have boomed in the interim. At the same time, the gold price has slid to 5-year lows. Some analysts are of the opinion that the price will reach $984 before January 2016 (Bloomberg News Survey). Sales of gold ETFs have accelerated in recent times, and it is fast becoming the bête noir of commodities traders. During the month of July, a staggering $5.7B of asset value has been eroded from gold ETPs. And with the slide in Chinese equities, weaker demand is likely to continue to hamstring the gold market.

Written By: Banc De Binary