Saturday, April 27, 2013

Has Gold ended its decade-long bull run?

The sharp plunge of gold prices has heightened fears among investors that the precious metal’s decade-long bull run has ended. Spot gold prices tumbled more than $100 an ounce in a few hours on Monday, and since last Friday its dropped 15% to a two year low of 1322 from the height of 1567, the sharpest two days tumble since 1983. 

People had been caught unaware by just how quickly the market has moved given that the fundamental investment case is unchanged. We have been careful when establishing gold-hedge positions even since gold moved below the $1,600 mark and the Fed started changing its tone on the US stimulus policy. Looking back, MTA players would agree now that our decision to cut loss of $120 on our long position in February was a good bet.

We have been watching all the market moves over the last three trading days. Clearly, everyone was trying to get out of gold regardless of the fundamental arguments. Selling that opened up on Friday and Monday has pushed gold down through two critical support levels of 1520 and 1470. The selling triggered panic stop losses and program selling.

When you have been watching markets and price movements for as long as I have and understand how markets think and operate, you will agree the latest rout on gold demonstrated the importance of technical analysis in determining price behaviors.

Although the extent of the sell-off has been so swift, so severe, and unprecedented in terms of my own experience based on the percentage decline, there were warnings all around that the gold price was going down for weeks.

Since 2009, gold has been part of our portfolio to hedge on the possible US dollar weakness driven by the US quantitative easing (QE) policies. We thought it would be prudent to replace the buy and hold hedging style with algorithmic trading approach early this year. It was clearly another right tactical move based on what is happening to gold and other metals these few trading days.

Does it mean the bull market for gold is gone for good? Long-term gold investors see the metal as a long-term store of real value in a debt-driven financial system. The long-term view is that all the QEs and competitive currency debasement that we are seeing will eventually push gold higher. Some believe every market on the planet is now subject to manipulation and that the latest gold’s plunge is a result of market manipulation. Others were surprised that gold had become less sensitive to bad economic news and market shocks so far this year.

The yellow metal did not react to bullish news which could have driven it up such as the Korea tension or weaker than expect US economic data that would have changed the Fed views on its policy. The Fed has signaled the end of QE in its last two monthly minutes of Fed rate-setting meetings.

In our next update in these troubled times, we would like to bring you back to the start of Fed’s QE program in late 2008 and explain what has been happening since then in terms of market action which will lead us to the near term outlook for gold and other markets. Stay tuned! 

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