Can Gold Regain Glow, Prior Highs After Sell Off?
Gold and silver prices regained some glitter Thursday on bargain buying, short covering, falling stock prices and worries over weak economic data, which support the likelihood the Federal Reserve will continue its monetary stimulus.
The SPDR S&P 500 ( SPY ) fell 0.62% in heavy volume to 150.40.
Spot gold prices rose 0.74% to $1,577 an ounce.
On the stock market today SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, added 0.78% to 152.62, bouncing off of an eight-month low. It has tumbled 12% from its 52-week high and 18% from its record high of 185.85 in September 2011.
"Painful to be sure, but we have seen much sharper declines before in this bull market, 23% in 2006 and 29% in 2008," Adrian Day, founder of Annapolis, Md.-based Adrian Day Asset Management, wrote in a client note Thursday. "Both times, gold snapped back sharply, exceeding old highs within a year."
GLD broke below the key 200-day moving average the prior week, signaling a strong downtrend. But it presents a contrarian buying opportunity at its new lows, Day contends.
"For a contrarian, the fact that hedge funds have sharply reduced their gold holdings is a positive sign. Perhaps at the next budget impasse in Washington, they will exit stocks and move back to gold," Day wrote.
"Another contrarian indicator is the rapid increase in the short selling of gold. According to Standard Chartered, there are 168 tons of gold sold short, well over the five-year average of 100 tons. What has been sold short, has to be bought back eventually.
"Lastly, various indicators have reached new extremes, including the oscillator indicator back to extremes last seen at the beginning of 2009, suggesting a near-term reversal."
What's more, the economic uncertainties that drove stock market investors to use gold as a safe-haven asset and hedge against inflation remain.
"Japan and Europe both reported weak GDP (gross domestic product) numbers last week," Day wrote. "For the U.S., unemployment remains high, as do debt levels.
"And while stocks have experienced a strong run, the fact that retail investors have started to pour money into equity funds, for the first time since mid-2008, should give a contrarian pause as to how long this rally may last."
The correction in gold prices will likely attract buying from central banks, which are buying the yellow metal to diversify their reserves.
The Federal Reserve has to continue quantitative easing, or injecting more money into the economy, and support the government's deficit spending to ensure that the economy keeps growing, which is very bullish for gold, Peter Schiff, president of Euro Pacific Precious Metals, said in a video blog posted on his web site Thursday.
Although gold prices may fall further, investors who sit on the sidelines or try to buy at the bottom could miss the rebound, which he expects will be "explosive."
"I think there is enough negativity built into the market that gold might have to top $2,000 an ounce before we bring these timid investors back in," he said. "If we had some austerity on the part of governments so that our economies could restructure, particularly in the United States, if the Fed acted responsibly instead of recklessly and took the punchbowl away instead of spiking it, that might be bearish for gold."
The Fed is printing money to devalue to the dollar so that Uncle Sam can pay off debts easier with devalued dollars, Schiff contends.
"It doesn't matter that stock prices are rising in nominal terms or that the economies appear to be expanding because we're spending all this borrowed money," he added. "In order to sustain this phony expansion, they have to continue to up the ante on quantitative easing. They've got to print more and more money just like a drug addict needs more and more drugs to stay high.
"We need more and more cheap money to keep this phony economy going and that is the best of all environments for gold."
Some technical analysts believe gold is oversold and has fallen near prior price support levels that attracted buyers before.
"I don't think it is time to catch the falling knife and bet on a big gold rebound, but at the same time I am out of arguments for why gold should continue lower," Tom McClellan, editor of The McClellan Market Report, wrote in a special client note.
The dollar usually moves opposite gold because a stronger dollar requires fewer of them to buy the same amount of gold. But in an unusual move, the dollar appreciated alongside gold Thursday.
PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, jumped 0.41% to 22.22. It regained the key 200-day moving average for the first time in six months and confirmed a new uptrend.
Market Vectors Gold Miners ETF ( GDX ) climbed 1.79% to 38.12. It's fallen 34% from its 52-week high, far exceeding the 20% drop typically used as signal for bear markets. It's also trading deep below both its 50- and 200-day moving averages, indicating a strong downtrend.
Gold miners' stocks tend to fall harder than the yellow metal but experience sharp rebounds, Day wrote. The XAU gold miners index rallied 159% in 2005 and 100% off its 2008 lows with junior gold miners flying even higher.
"One can't be sure how much lower or for how much longer gold will fall, but we are closer to the bottom than the top, for both gold and gold shares," Day wrote. "Valuation indicators for gold and shares are near long-term lows. The clear breakdown of budget talks may provide the trigger for selling the stock market and moving back into gold."
Silver prices picked up 0.28% to 28.74.
IShares Silver Trust ( SLV ) added 0.50% to 27.73.
Global X Silver Miners ETF (SIL) rose 1.47% to 18.62.
Follow Trang Ho on Twitter @TrangHoETFs .