Gold market is rather volatile. It is subject to major move, rush and panic. A few years ago, gold was considered the most stable safe-haven asset and popular financial instrument. However, the situation has change a lot since then. In spring 2013, we saw a major price decline by $200 per ounce.
What caused such a deep retracement against the long-term rally? What are the near-term prospects of the gold market? Let’s try to answer these questions together with Masterforex-V Academy…
Gold Market Tendencies
Gold used to be rallying for 12 years till reaching the all-time high in 2011. The rally was relatively stable then. In 2011, the price of gold nearly hit $2000/oz. At that time, most analysts explained the strengthening by the crisis of bond investments and the overall weakness of the global economy. The Fed’s QE was considered another major reason for the gold rally. Indeed, it was quite logical to afraid that such a substantial increase in the money supply initiated by the Fed may well provoke inflation growth later on. At that time, bullish predictions for gold were attended by poor forecasts for the European and American economies.
Still, early 2013 brought gold another record. Only this time it was a negative one. In other words, gold hit a major low at $1319/oz. Silver also depreciated down to the lowest level since 2010.
Wee, it is not that difficult to figure out the reasons for that:
· The US economy is recovering, though the recovery is slow.
· Stock markets have strengthened.
· The eurozone debt crisis is not as sharp as it used to be.
· Ben Bernanke hints that the Fed may well curtail its QE plan later this year if the US economy keeps recovering.
The latest statement triggered gold sales since investors stopped considering gold as a safe-haven asset. Gold is a good asset to hold in crisis. However, the situation seems to be improving, which makes investors turn risky and invest in stocks and other assets. No inflation - no gold investing. Even George Soros, the world-famous billionaire and investors, announced that gold wasn’t a safe-haven asset anymore and curtailed his gold holdings by 12%.
Even a 4,5% decline in the market of the US Dollar index somehow failed to cause a rally in the market of gold. On the contrary, gold lost 2% more after the USD index declined. The chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in the market of the US Dollar index:
At this point, gold has lost 22% of its value since early 2013. There has been a major flight of capital from gold funds. Investors are focused on US stocks and indices. That is why Dow Jones Industrial exceeded the pre-crisis level of 2007 in March 2013.
Meanwhile, many analysts say that gold may well decline down to $1000/oz. Even in the best-case scenario, the price of gold won’t be able to exceed $1400 this year. Till the end of summer gold may drop down to $1245/oz in advance of the Fed meeting in September.
Still, at this point, QE seems to produce little or no effect when it comes to the US economic growth and gold prices. Still, if the Fed closes the QE program, this may cause unpredictable consequences. On the one hand, it may bury gold by making it collapse below $1000/oz since investors won’t feel the need for safe-haven assets. On the other hand, this may cause another crisis in the USA, this pushing gold prices to new highs.
Experts say that today’s economic situation worldwide cannot let them make confident forecasts. There is no certainty and stability. Still, we should always keep in mind that in advance of the 2008 crisis gold saw a bearish trend as well.
The chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in the market of gold:
