Now Might Be A Good Time To Sell Gold Short-Term Before The Bounce
Commodities / Gold and Silver 2014 Nov 28, 2014 - 04:39 PM GMTBy: Submissions
Nicholas Maithya writes: The price of gold has been on a gradual decline since hitting its best form and highest price ever in history in 2011 when it eclipsed $1,873 per ounce. The price of the yellow metal has experienced several dips and rebounds during this time, but at the end of the day, the main trend has remained the same all through, with the price falling to the current level of $1,193, the lowest level since 2010. This movement has been driven by a series of events that carry both fundamental and technical characteristics.
The movement of gold prices has also been mirrored on the accompanying ETFs with the SPDR Gold Trust ETF (GLD) dipping and rising at similar occasions with the price of the underlying yellow metal.
The SPDR Gold Trust ETF also hit a new low of $112 last witnessed in 2010, which illustrated the nature of the decline in price over the last few years. The SPDR Gold ETF hit a high of $177 in 2011, but since then, the general trend has been a downward wedge characterized by a series of dips and rebounds.
Why Gold prices continue to fall, Fundamental Perspective
From a macro-economic point of view, commodity prices including those of various precious metals like Gold and Silver have suffered over the last few years, as demand remains muted. The economic slowdown in China, which is one of the world’s leading commodity consumer including Gold, Silver and copper has had its impact on overall global commodity prices and according to a new world bank report, commodity price are expected to maintain the current decline through 2015.
Secondly, since the U.S opened the fist quantitative easing (QE) program, this provided optimism to investors on U.S equities with global stocks rallying on the news. The QE was part of the U.S governments economic recovery strategies as it continued to sell assets to the likes of China in exchange of monetary boost, which it used to boost government spending during the tough economic times.
This meant that there was no need for investors to put their money in gold as a safe haven, but rather sought to get the most out of their money by investing in the equities market. The resulting scenario was a decline in demand for gold, and hence a continuous fall in price of the precious commodity.
Additionally, recent economic events from the U.S department of commerce suggest that the price of the yellow metal could continue to fall as the U.S dollar (USD) continues to strengthen against major currencies.
The U.S has delivered hope towards an uptick in interest rates, which means a stronger U.S dollar. Investors and traders seem to have already bought into the country’s promising economic growth story, as the unemployment rate, the U.S monthly jobs numbers, as well as, the quarterly economic growth rate continue to improve.
This means that investors and traders are already factoring in the potential uptick in interest rates next year, in which case, it would be a major boost for the USD. This continues to put pressure on the price of major commodities including Gold, Silver and Crude Oil among others. Therefore, gold is in a situation where, it can only go down or down, albeit with temporary rebounds, like has been the case over the last few years.
Why now could be a good time to sell GLD, Technical Perspective
Based on recent price patterns of both the price of gold bullion and that of the SPDR Gold Trust ETF (GLD), the current signal suggests that it could be a good time to take a short position on the two instruments.
From a swing trading standpoint, both Gold Bullion and GLD appear to have hit a possible turning point following the recent rebound. Since gold fell below the $1,200 per ounce mark at the end of October, that level appears to have become the new immediate resistance level, as it aligns well with the current downward trending resistance zone.
Now, form my experience in using various swing trading strategies, this appears to be a perfect opportunity to place a short position with a view to closing it within a week or a couple of days. The current levels seem like potential key reversal points, following recent price movements on both instruments. Therefore, traders could still strike a profit albeit with a short-term view.
On the other hand, the bulls need not worry much because, on a long-form approach, both the SPDR Gold Trust ETF and the Gold Bullion appear to be at the early stage of a price recovery. Nonetheless, with the fundamental factors to worry about, the upside potential remains gagged with $1,300 an ounce and $125 per share, being key resistance levels, for the gold bullion and the GLD respectively.
Conclusion
Both the Gold Bullion and the SPDR Gold Trust ETF appear to have a limited upside potential following the recent decline. However, as has been the characteristic of both instruments, every move has experienced a series of dips and rebounds.
Currently, the signal suggests that it could be a good time to open short positions on both, albeit with a short-term view, as the intermediate price targets signal that bulls should hold their positions. Nonetheless, as the U.S economy continues to recover, both the Gold Bullion and SPDR Gold ETF upside potential remains checked.
Brief Bio:
Nicholas is a financial analyst by profession with extensive experience in investment research and stock market analysis. I am currently a published author at Seeking Alpha, and a writer at Quantshare.Com, a trading software company.
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