Gold, Silver: What To Expect After Chinese New Year
The Year of the Snake sank its fangs into gold and silver investors , with the precious metals melting to one-month lows as Asian markets closed for Lunar New Year holiday.
Traders also sold positions ahead of the G-20 summit later this week when world leaders will discuss currency devaluation.
"With Asian markets closed for the New Year holiday, speculative selling from the West was not held in check by the usual physical off-take from the Eastern corner of the world," Chris Blasi, president of Neptune Global Holdings, a precious metals dealer in Wilmington, Del., said in an email. "Thus, the bears were able to take gold down to the lower end of its trading range near $1,640."
Blasi added: "Bears will try to push gold down through this support, but ongoing Central Bank buying should emerge to buoy the price. Recent news regarding the extent of Russian gold buying does serve to solidify the case for gold as a longer-term hold for investors."
Gold's weakness suggest the market is pricing in 1) a declining likelihood of a European financial collapse, 2) improvement in the U.S. economy decreasing the need for more economic stimulus from the Federal Reserve and 3) a lower U.S. deficit, thanks to higher tax rates, says Andrew Hill, president of Andrew Hill Investment Advisors in Naples, Fla.
Gold faces price resistance at $1,700 an ounce and support at $1,660 an ounce, Marc Ground, a commodity analyst with Standard Bank wrote in a note. Heavy short-selling suggests the yellow metal is prone to experience a short-covering rally in which traders betting on falling prices buy back gold to close their positions and thereby push up prices. Total short positions in gold amount to 168.2 tons, well above the five-year average of 100.8 tons, according to Standard Bank.
"Gold continues to be the most oversold of any sector we look at," Harry Dent, founder of HS Dent in Tampa, Fla., wrote in an email. "We think gold is likely to retest its lows or a bit lower around $1,625, then could make a big move to $1,800 minimum, and more likely to $2,080. This could happen between mid- to late February and late May. We look likely to give a second buy signal in gold and silver if they can hold up pretty well over this week."
The sell-off was probably provoked by European Central Bank President Mario Draghi and French President Francois Hollande both suggesting that the euro is overvalued and should be weaker, says Adrian Day, president of Adrian Day Asset Management in Annapolis, Md.
"Even though gold has separated from the euro for the last two to three months, nonetheless fears of a lower Euro would lead to a lower gold price," Day wrote in an email. "At the same time, the holidays in Asia for the Lunar New Year mean an absence of physical buying this week."
He believes investors should buy the dip and that some "catch-up buying" could take place when the Chinese -- the world's biggest buyers -- return from the holiday week.
PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, was flat.
"This time it does look to me like the rally in the U.S. dollar is at the root of the sell-off in gold," Paul van Eeden, president of Cranberry Capital Inc., a private Canadian holding firm. "Also, the market is starting to price in the end of QE3 (quantitative easing), and with that, the possibility of higher U.S. interest rates."
Market Vectors Gold Miners ETF ( GDX ) dropped 2% to 41.64.
"As long as the Fed is buying $85 billion a month in Treasuries and other central bankers are doing likewise and the shares are (trading) at a discount to private market value, we will continue to hold," says Mark Travis, president and CEO of Intrepid Capital Management in Jacksonville Beach, Fla. "I have held gold and gold shares most of this decade and a $15 an ounce movement in price doesn't change my thinking on this subject."
GLD trades below both its 50-day moving average and 200-day moving average, which confirms a strong downtrend. It has a very weak IBD Relative Strength Rating of 23 and Accumulation/Distribution Rating of D-, on an A-to-E scale. That means its price action has lagged 77% of the market the past 12 months and that institutional investors are heavily selling more shares than buying.
Silver prices dropped 1.53% to $31.05 an ounce.
IShares Silver Trust (SLV) skidded 1% to 30.01. It appears to be finding support at its 200-day moving average but it's fallen below its 50-day line, which is very weak. It carries a very weak IBD RS and Acc/Dis Ratings combination of 29 and D+, indicating it's lagging 70% of the market and institutions are selling more than buying.
Global X Silver Miners ETF (SIL) tumbled 1.61%.
Follow Trang Ho on Twitter @TrangHoETFs .