Is Gold on the Edge of a Violent Downturn?

Gold is on the brink of a “violent downturn” and could even fall as low as $700 an ounce as the risk of deflation in developed economies grows and technical pointers turn bearish, one expert tells WSJ.

“Technical levels show us when the trouble is coming. Gold struggled at $1,700 and then at $1,600. If it breaks through the next key level of $1,500, which could be approaching soon, investors would start panicking and selling hard,” Yoni Jacobs, Chief Investment Strategist at Chart Prophet Capital said on Thursday.

which has fallen below $1,600 eight times in the past 10 months, is currently trading below the key 200-day and 300-day moving average of $1,650 and $1,670, respectively. The 300-day moving average has supported the bull market in gold since 2001, however this is no longer the case, he said.

“It appears that the market has decided on gold's fate. And it's not looking pretty.  It looks like gold is about to see prices collapse and is on its way to $700,” Jacobs added.

The two main triggers for a large selloff in the precious metal could be a further slowdown in global economic growth - which would likely result in deflation - or inaction by leading central banks such as the Federal Reserve or the European Central Bank. (Related: Largest Holders of Gold)

“Gold is a commodity, just like everything else, and if the world economy goes into a recession or if we see slowdown, gold is not safe from a commodities slowdown,” Jacobs said.

“Just like you see oil falling from $115 to $80 – we will see the same thing with gold and it’s already underway.”

He added that the absence of further “money printing” by the Fed, which has supported gold prices in recent years, could spark selling in gold.

He thinks the Fed - which has extended “Operation Twist” that involves selling medium-term bonds and using the proceeds to buy longer-term ones - may hold off a third round of quantitative easing due to mounting political opposition from Republican lawmakers.

“Most investors and financial institutions are heavily relying on governments and central banks to support asset prices by money-printing, but the reality is finally sinking in that there is not much to be done - it might be too risky, too inefficient, and too late,” Jacobs said. (Related: Largest Gold Mines)

Downside Pressure Just Short-Term?

Warren Gilman, Chairman and CEO of CEF Holdings in Hong Kong, agrees that gold will come under pressure in the short-term, driven by profit-taking.

“If one can take a profit in these uncertain times lock in some cash, then one is going to do that. It’s also a source of some liquidity, so I do believe that the bias on the (gold) price is on the downside in the near-term,” he said.

However, he maintains a positive outlook for the precious metal in the long-run. “In this environment where you have  negative real interest rates, and you have central banks acquiring gold at historic levels over the last few years, the gold price will definitely  rise. I’m a long term believer in gold; I’m not taking a short position.”  

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