Gold plunges as "risk-on" trade discourages haven buying

Gold and silver have fallen over 2 percent each today. It is not clear what exactly caused the metals to plunge. It could be that the stronger equity markets have discouraged some market participants from tying up their capital in the safe haven assets. After all, it was the weakness of the markets last week which helped gold prices to rise in the first place. Today, stocks have rallied on the back of some better than expected earnings results from Citigroup, M&A news in the UK and receding fears over Portugal’s banking sector. The fact that the physical demand for gold has been subdued has also weighed on its price. The recent flows into gold-backed ETFs, for example, haven’t been strong enough to totally justify the firmer prices we saw last week. What’s more, the Indian government disappointed the market last week by refusing to trim the import duty on precious metals when it announced the 2014/5 budget. As a result, gold’s physical demand from India is likely to remain subdued ahead of the wedding season, which unofficially begins around September. The recent price upsurge may have been driven almost entirely by financial speculators who have now taken profit on their bullish positions. Indeed, the CTFC latest positioning data, released Friday, showed net long positions in gold increased by 7,822 contracts to 133,800 in the week to 8 July – their highest since November 2012. Because gold prices climbed higher since Tuesday, net longs may have likewise increased further in the second half of last week. Thus it is likely they have been reduced sharply today, causing gold prices to plunge.

There’s also been some technical selling below the $1330 support level where a cluster of stop loss orders were probably triggered which exacerbated the sell-off. At the time of this writing, gold was hovering around $1305. It was thus off its earlier lows of $1303 by only $2, which is not a great sign given that most of the European traders may have already gone home. This $1305 area corresponds with several technical levels: the 100-day moving average, the upper side of the long-term broken downtrend and the 38.2% Fibonacci retracement level of the upswing from the June low. So, gold needs to defend this support area otherwise we could see further losses over the coming days. On the downside, the 50% retracement level of the aforementioned price swing meets the 50-day moving average at $1292/3, while the 200-day average converges with previous resistance at $1285. Some potential resistance levels to watch on the upside are around $1310, $1315 and $1330.

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Source: FOREX.com.