Friday, April 18, 2014

Still no fear catalyst for gold

Press reports blamed this week’s decline in the gold price on high frequency trading programs (what else?), which allegedly shook out the weaker gold positions.  Ever since the publications of Michael Lewis’ latest blockbuster book, Flash Boys, HFT trading has become the media’s favorite financial villain.  Every pullback or short-term market hiccup is now blamed on HFTs, and while there’s undoubtedly some truth to the allegations, the underlying technical structure of the market is being overlooked. 

The most dominant factor governing gold prices isn’t HFT trading algorithms, but lack of a major fear catalyst.  Without the necessary level of anxiety – be it geopolitical or economic in nature – investors are likely to continue ignoring gold in favor of riskier assets, or else assets with sustained forward momentum prospects (such as Treasuries).  For now the gold price continues to languish as fears over Ukraine, China, et al, take the back burner to more upbeat news concerning positive U.S. corporate earnings and economic headlines.

For example, news headlines touted the strong recovery in the U.S. job market.  New claims for jobless benefits are now near their pre-recession lows, according to a Reuters report on Thursday.  Meanwhile the latest manufacturing data for the Md-Atlantic region accelerated in April.  Earlier this week the latest retail sales and industrial production data gave equity investors reason to cheer.  Conversely, it was all the more reason for gold traders to liquidate positions as a defensive stance was viewed as counterproductive in such a positive news environment.

From a technical perspective, the price of gold (basis June futures) has not only slipped back below its 15-day moving average but is now also below both the 30-day and 60-day moving averages.  The short- and intermediate-term trend lines for the gold price have now been broken and gold is in a vulnerable position.  As you can also see in the following chart, our special stochastics indicator (below) has confirmed the recent sell signal….

[Excerpted from the Apr. 17 issue of Gold & Silver Stock Report]