Is It Time To Look Away From Gold?
Submitted by Emma Davis as part of our contributors program .
By George Leong
Lately, I've been reading about all of this buying of gold bullion by central banks around the world.
Some would say the move is bullish for the precious metal, but I'm not convinced. I was encouraged by the recent bounce after the price fell below $1,400 an ounce, but it has since stalled, based on my technical analysis.
To tell you honestly, I'm not sure in which direction the yellow metal will move. The recent rally was more technically driven than based on fundamentals.
There are many factors involved that could encourage the precious metal's future direction.
If the Syria-Israel conflict intensifies into something more, we could see some traders and institutional money move into the yellow metal as a safe haven.
There is a direct relationship between the yellow metal and interest rates. In other words: follow the global central banks and you'll get a sense of where the metal may be headed.
And as long as interest rates remain low, we could see some buying support for gold, but when rates begin to rise, prices will likely fall.
Currently, the central banks are printing money, which will keep interest rates low, and this should give the yellow metal some buying support.
Of course, for the yellow metal to move higher, we will need to see major risk surface, such as inflation, a major conflict, or a sell-off in the stock market.
As long as the stock market holds and moves higher to new records, the precious metal will be under some pressure. The fact is that as stocks move higher, investors will prefer to invest in stocks.
The chart below shows the relationship between gold (indicated by the green line) and the S&P 500 (indicated by the candlestick formation) since November 2012. Notice the downward bias in the precious metal at a time when the S&P 500 was moving higher toward a new record.
Chart courtesy of www.StockCharts.com
After pausing at the $1,460 range, the price retrenched $22.00 on Tuesday. I sense that the upside potential is limited at this point, unless something chaotic surfaces in the world.
Gold simply remains a trade and should not be viewed as a buy-and-hold opportunity.
There may be a possibility that the metal will return back to its previous sideways channel, bordered by $1,525 on the support side, but I doubt this will happen as long as stocks are holding.
For traders, it's all about the best opportunity at a particular time - and at this time, it's not gold.
The bottom line is: with the excess liquidity being pumped into the monetary system by the Federal Reserve and central banks around the globe, I would look elsewhere - away from gold.
This article Is It Time to Look Away from Gold? was originally published at Investment Contrarians