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Is Gold’s Rally a False Move?

by on February 18, 2014 4:49 pm BST
 

Market participants have been betting on a gold recovery as the precious metal broke $1,332 per ounce before pulling back on profit taking. Over $40 billion worth of gold investments were pulled last year on hopes of greener pastures in an economical wonderland. Almost 881 tons were dumped in exchange-traded products (ETPs), but it could have been worst if the physical demand was not seen in China and the rest of the Eastern world.

Gold has outpaced equities in 2014, gaining over eight percent, but demand has tapered off in the paper market. According to the World Council, gold demand slipped last year after the first bear-year in over a decade. However, as paper assets were being sold by institutions, individual investors snatched up gold bars, rounds and jewelry at record levels. Central banks added 61 tons of gold with the 28 percent decline in gold prices.

Market participants could have anticipated a rally after last year’s performance, but there are still many still bearish in the metal. Goldman Sachs has reassured that gold will grind lower and still stand behind there sub-$1,100 target. Dominic Schnider, head of commodities research at UBS wealth management, said “The strength is not going to last.”

Gold’s rally could see a pause after being unable to close above technical resistance of $1,327. However, economic data will be the key driver behind gold and needs to be monitored. Technically, gold can fall to $1,307, potentially $1,291 with the uptrend still intact.

When weather is no longer an excuse, data going forward will determine the direction of precious metals. If a trend of positive data is established, bearish gold targets remain relevant. Conversely, data that continues to degrade will be bullish and an upward revision will be needed.