The headlines are "killing" me.
So-called death cross is not gold’s only problem
February 20, 2013, 10:20 AM
“Death cross.” It sounds like the stuff of nightmares.
The week is not going well for gold, again — and that’s after some had predicted that China might start jumping in after leaving gold on its own last week during those Lunar New Year celebrations. (See report from earlier this week: Could China ride to gold’s rescue?)
Gold GCJ3 -1.43% was down $17 and counting Wednesday. Part of this was possibly due to the fact that the 50-day moving average looked at minimum very close to the 200-day moving average on our FactSet charts. Some were saying the two had crossed and were deploying the term “death cross.”
According to Ole Hansen, head of commodities strategy at Saxo Bank, a death cross only occurs when both of the averages are heading south and touch on the downside. “At the moment,” he explains, “the 200-day moving average has been flat and the 50-day has been pointing slightly upward, so it’s not a death cross in its true definition.”
He says a so-called death cross has only occurred about three times in the last few years, most recently last April, at around $1,675, which fueled an 8% drop in prices. Another cross that happened back in 2008 was much worse, triggering a 16% drop. But these crosses and such threats can drive sentiment, which is already weak for gold right now.
“I wouldn’t call this the end of the rally. Looking at recent history, though it has created some extended moves when these crosses take place,” he says.
But still, he says, the term death cross will get batted around and make it into the headlines, potentially scaring more investors away from gold, possibly draining money out of ETFs like SPDR Gold Trust GLD -1.39% , which is down about 5% so far this year.
“Just the fact we’re talking about it means that others who are following it … will be reading the headlines: ‘We have a death cross.’ They’ll play it safe, and that obviously in itself has got the market on the run.”
Hansen says there are “increased amounts of naked short sellers in the market” and sentiment is extremely vulnerable.
On a technical level, gold is within $10 of the first level of significant support, he says. The first proper test of whether these levels are attractive enough to bring in buyers will be $1,582. If gold takes that out, it heads back to lows going down to $1,525. On the upside, gold needs to regain $1,625 and then get to that 200-day moving average of $1,666, he says.
Of course, Hansen says, gold bugs shouldn’t feel singled out: The entire commodities sector — outside of crude oil — is in the dumps right now. And that’s mostly down to the fact that investors prefer stocks right now, and they really are paying no attention to currencies either. “We need a shakeout in the stock market,” says Hansen, “for sentiment to change.” And Wall Street’s being driven by that wall of money, driven by expectations for better growth and earnings expectations, he says.
One more disappointing development for gold, again from China: On Monday, the government announced it wants to drain liquidity from local money markets for the first time in eight months. That keeps a lid on inflation and demand limited for gold from an inflation-hedge standpoint, says Hansen.
Gives new meaning to the term “liquid gold.”
– Barbara Kollmeyer
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