Gold hit fresh 2014 lows on Friday as CME Group (GLOBEX) futures for December delivery shed $22.20, closing at $1192.20, far below the seemingly sturdy $1,200- $1,205 support level. The SPDR Gold Shares ETF plummeted $2.11 or 1.81% and is within 20 cents of marking a 52-week low. Given the dramatic move, the CBOE Gold Volatility Index gained 5.11% and is trading up .93 cents to $19.13
Over the past few months even gold bulls would agree the trading felt increasingly “heavy." Consensus became bearish on gold around the beginning of 2014, the same time the Fed decided to begin taper its unprecedented asset-purchase program. Consensus believed that tapering would eventually make way for tightening which, in turn, would wind up being a death knell; a gigantic cross over the gold’s prices head.
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As these trading ideas normally play out, the consensus viewpoint was quickly shaken out of its conviction in February and March when gold catapulted from $1250 peroz. to near $1,400. Not wanting to fall for the “banana in the tailpipe" trick again, traders became less bullish as opposed to more bearish for the remainder of the year.
The last three months however, have been exceedingly different. Imagine gold’s most recent price plunge and compare it to a friend who’s been in a tragic accident and most recently emerged from the hospital. Your first thought typically is, “So-and-so is a figment of his former self”. Simply put, gold has quickly become a shadow of its former self as well. Most of the downward drivers of gold have, by and large, been known to the market for months.
The long-term trading outlook for gold continues to be pointed to the downside with intervals of convincing sideways trends – laborious enough to keep the gold short from being overly confident with its conviction.
Macroeconomic news flow out of the U.S. will persist in favoring a hawkish Fed going forward, and will cast a very long and dark shadow over any attempts to push gold meaningfully higher. The strength in the U.S. dollar has also done wonders in adding to gold's vulnerability, and to some degree, the correlation between gold’s weakness and dollar strength, although well published, in my view, underappreciated.
Exchange traded Fund outflows persist, Asian demand is absolutely lackluster (as judged by the London Metals Exchange – Shanghai Futures Exchange arbitrage) and Indian import restrictions – instituted in 2013 – seem to be years from being relieved.
It’s no doubt that Friday’s price action was a severe wash-out and falling beneath a key psychological $1,200 level will leave a mark.
Fundamentals have shifted from the cyclical to the secular. Fears that projected gold to above $1,900 in 2011 have now clearly shifted and it's now in the process of finding fair value in a world of diverging monetary policy, structural changes in China, lack of inflation, and uneven growth metrics.
Going forward, anticipate a lot of choppy, volatile, sideways action as we are in the midst of a monetary policy experiment that has never been attempted and there is no guarantee of how it will end.