Gold prices extended losses on Friday to hit a six-month low and breached key chart support levels at $1,625, its previous low for the year, triggering a technically-driven sell-off.
Gold stocks and ETFs are also down sharply today.
“Prospects for better global growth,” says the latest Metals Matters Monthly from bullion-bank Scotia Mocatta, “have increased the opportunity cost of holding gold.”
Adding fuel to the fire, yesterday data showed billionaire investor George Soros cut his holdings in the SPDR Gold Trust, the world’s largest gold exchange-traded fund, by more than half in the fourth quarter of 2012. This news helped facilitate gold’s decline.
“The 1,625 level was a big support and once that was broken, stop-selling orders kicked off and now we are in a new range of $1,550 to $1,625,” said Adrien Biondi, head of precious metals trading at Commerzbank.
Sell stops are automatic technical selling signals that start after prices break through key support levels which allow traders to limit losses in a falling market.
“With prices coming lower, all the physical buyers will start covering some of the shorts and maybe some investors will come around as well,” postulates Commerzbank’s Biondi.
The physical market was quiet in Asia but some expect Chinese players may take advantage of the lower prices to replenish stocks when they return from their week-long public holiday for the Lunar New Year celebrations on Monday.
On a positive note, this week the World Gold Council reported that in 2012 central bank purchases accounted for 12% of total demand, equal to nearly 1 ounce in every 8 sold worldwide. Confirming the world’s central banks are very much net buyers of gold.
However, GFMS metals consultancy’s Paul Walker states, “This market is going to stand and fall at what individual investors decide to do. Don’t put much weight on what the central banks are up to.” Walker adds, “This is all about the search for yield. The glue holding this together is negative real interest rates.”