Fear More Important Than Facts in the Gold Market

The price of gold is a slave to market sentiment. How people feel about economic conditions, no matter how vague that feeling might be, is reflected in the price of the precious metal. Uncertainty and fear of economic slowdown has seen capital flooding back to gold. Just recently the fear of poor US economic performance saw gold hike from the 1052.00 handle to a high of 1273.00. However, the slightest optimism towards US economic strength flattened out the trend line and now sees gold ranging until another upset changes its course again.

With US economic indicators looking ostensibly better than previous weeks, the movement towards Gold began to subside significantly. Even the market‘s swing away from the dollar was unable to bring the metal high enough to test resistance as it begins to consolidate. PPI, Philadelphia Federal Manufacturing Index, and Unemployment Claims results all showed positive progress last week. Cautious optimism seems to be keeping the price steady.

From a technical angle, we can see gold is now moving in a sideways trend. The precious metal is now forming a channel between the 1279.58 resistance and 1226.28 support levels. Now that the RSI and Stochastic oscillators have indicated the commodity no longer rests in overbought territory, selling pressure has abated as the market makes up its mind about the US economy. The 12, 20, and 100 day EMA’s are beginning to level out as the Bullish trend looks to be ending.

Moving ahead, the market will be waiting for Core Durable Goods Orders and US Final GDP results this week to confirm any optimism about the US economy. While GDP is expected to come out as 1% q/q, the predicted 0.2% decrease in Core Durable Goods Orders may keep scepticism about the US economic recovery alive. While a degree of uncertainty about the US is present, Gold is likely to range until the results are confirmed which could lead to a slow week for the commodity.

One problem with commenting on the gold market comes back to the role of fearfulness in effecting the Gold price. Even when indicators are signalling US economic recovery, a climate of fear can continue to push up Gold prices and depreciate the USD. This fear is not well captured by any current technical or fundamental indicators, this makes gauging potential movements caused by the emotional response difficult.

Prices moved by general sentiment towards the economy are not necessarily wrong. However, it becomes problematic if the fearful reaction is at odds with the economic reality of the situation. The problem is only compounded when the increasing price of Gold is subsequently used to signal that there is sinking confidence in the US economy.

In the end, predicting Gold’s price can come down to more of a gut feeling than sound technical and fundamental analysis. Among commodities it might be the most beholden to sentiment trading, fear over economic health being the chief agent of change for the metal. More problematically, the fear driving the price movements are self-fulfilling prophecies. The more the price goes up, the more fearful traders become and the more money they sink into gold.