Gold to Head Lower Near-Term Given Run Up

by on January 7, 2014 5:26 pm BST

Hedge funds, as a whole, were increasing their bullishness on gold given the large declines over the last year. According to the US Commodity Futures Trading Commission (CFTC) data, long-bets on gold increased 19 percent in the last week of December, while short positions declined 4.6 percent in the same period. However, there are firms that still remain bearish over the near- to long-term, including Goldman Sachs and Technical Research Advisors LLC.

In the first week-and-a-half of 2014, gold climbed from a new 2013 low of $1,181.4 to just above $1,240. However, the short-squeeze may have played out, at least for now. Price action climbed to price action resistance on the 4H chart and began to rollover breaking through the 200 and 20 EMA. Price action is currently approaching the 50 EMA.

Louise Yamada of Technical Research Advisors said “the market still looks very weak.” Hindsight may have played a part in thinking a move upward was only rational after gold hitting its first declining year in 13. However, Yamada added “there is potential for further declines, and it’s too early to say if the market has a double bottom in place.”

Goldman Sachs commodity analyst Jeff Currie also said gold is “likely to grind lower.” Bears are still bearish given that the key drivers in gold are still stuck in neutral as the overall economic picture is better than a few years ago. Analysts must keep in mind that during gold’s monster decade-plus bull market, prices appreciated 500 percent and see large gains as the Federal Reserve began to introduce quantitative easing measures. Now, the Fed is beginning to taper back some of the stimulus, and this should have a negative effect on precious metals.

After a 12-year run and a 500 percent gain, is a retracement of a quarter of that really out of the question?

In the next few day, though, gold is likely to head lower and approach $1,200 an ounce once again. Currently trading at $1,225.70, price action fell from resistance at $1,245.20. Support on the 4H chart is seen at $1,220 per ounce. Near-term target to the downside, given support breaks, is $1,210. While a pullback to the 200 EMA is possible at $1,235.

4H Chart of GC

4H Chart of GC

Momentum of the downward move is strong. The ADX is beginning to slop up to 23, while the -DMI is steeply-sloping through 29. The RSI is aggressively sloping downwards, as well. At on 45, the RSI can still achieve lower-lows before considered overextended.