Gold Gives Up Gains for Year—and Could Go Lower-Forex

Gold is basically back to breakeven for the year, and analysts say the precious metal looks set to go even lower.
June gold futures plummeted $35 an ounce Tuesday to end the session at $1604.50, after briefly dipping to $1595.50, the lowest settlement and intraday price for gold since Jan. 3.

Gold has plunged about $120 from this year's high near $1715 an ounce in early February.

The primary catalyst for gold's slide, say traders and analysts, has been the euro's decline and resulting strength in the U.S. dollar due to worries about the economic future of the eurozone, following weekend elections in Greece and France. 

Gold's initial break below a key technical support level—$1,625 an ounce—at the start of the open-outcry session at the Nymex Tuesday also exacerbated the selloff. 

The situation in Europe is "fueling an anti-inflationary sentiment," said RBC Capital Markets precious metals analyst George Gero. "You need to own gold to protect your purchasing power because you think prices are going through the roof. Now what is happening in Europe is deflationary, not inflationary, because the economic recoveries are slow in coming," which has pressured gold prices.

Sentiment is also getting even more bearish.

"Open interest in gold futures also rose yesterday, indicating that new short positions are entering the market," says gold trader Kevin Grady of Phoenix Futures and Options. "A lot of longs have already liquidated and off of a move today you'll see more shorts entering the market."

Now that gold has broken out of its recent trading range, look for further weakness, analysts say. "It's been going sideways since September, 2011. Usually when you fail at the top of the range, $1800, you come down and kiss the bottom," says Jordan Kotick, global head of technical strategy at Barclays Capital. "So the bottom end of the range is the mid- to low-$1500 handle."

Traders say another factor contributing to the weakenss is the possible selling of oil by Iran to China in exchange for gold, leading to a spot gold sale to close out the trade. They also point to the significant short position placed on gold by Berkshire Hathaway. Berkshire Hathaway CEO Warren Buffet reiterated his argument that gold is an unproductive asset that will be outperformed by stocks or even farmland. 

It appears Berkshire "is at war with this asset class," says Ross Norman, CEO of Sharps Pixley, a London-based physical precious metals trading firm. RBC Capital's Gero agrees Buffet's comments could be a contributing factor to the gold selloff.

But other traders say Tuesday's gold selloff has been influenced more by technical selling.

"Gold has been stuck in a trading range for months and now it's broken out and initiated a new direction. I think you trade the short side right now," says gold trader Mihir Dange of Amarok Capital.

Trader John Netto of M3 Capital agrees that in the short run the technical damage in the gold market, with prices falling below the $1625 support level, has built up tremendous downside momentum that may have set up a move to as low as $1400 an ounce. 

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae