Gold: The Selloff Isn’t Done Yet…

| April 17, 2013 | 0 Comments

gold bars & coinsLet’s pick up right where we left off on Monday…

As you’re likely aware, gold took a severe beating this week.  The price of the yellow metal dropped $80 an ounce last Friday.  The panic sell-off continued Monday as gold plunged a whopping $130… the biggest one-day drop for gold in 30 years.

Trading was volatile Tuesday but gold managed to eek out a slight gain of 1.1% on the day, closing at $1,367 an ounce.

Now that we’ve witnessed this remarkably bearish turn of events for gold, what’s in store for the yellow metal as 2013 advances?

Is there any chance gold can restore its former glory by year-end?

Let’s look to the charts for some clues…

Gold

As you can see, gold’s daily chart is downright ugly.  The lustrous metal abruptly broke below $1,550 support in recent trading.  Any technical analyst worth their salt will tell you $1,550 was a vitally important level that bulls have used to hold this market up since late 2011.

The one conclusion you can draw from this chart– gold is currently a falling knife. 

And maybe you’ve heard the old market rule of thumb… “never try to catch a falling knife.”  Unless you’re a highly aggressive trader, there’s simply no technical reason to be bullish of gold based on a daily chart.

Unfortunately, a long-term chart paints a similar story…

Gold

Now that $1,550 has been broken, there’s a lot of air between current prices and the next form of major technical support.  The green line in the chart above reveals gold could easily settle out at the $1,200- $1,250 area (blue circle) in coming months.

Of course, there are plenty of stubborn investors making the argument that gold is already drastically oversold and ready to move drastically higher.  

While I would usually agree with that contrarian assessment, this time it’s different…

You see, gold is a very speculatively priced commodity.  In other words, it’s only worth what other investors are willing to pay for it.  And now that bullish investors have taken a severe beating, the sentiment towards gold has gone from one of love, to one of hate.

That fact alone makes the odds of gold rebounding to $1,550 or higher by the end of the year highly unlikely.

Yes, we will likely see some spectacular one-day rallies for gold here and there.  But as long as government inflation numbers stay contained (which they currently are), rallies in gold are best sold.

Bottom line…

The short-term bullish case for gold has been completely doused over the past few days.  What’s more, the idea that gold is a “safe haven” investment has obviously been turned on its ear.  Safe investments never drop 14% in two trading days.

Now, that’s not to say gold will never recover from its recent drubbing.  Given plenty of time, this market will heal and bulls will return… just don’t expect it to happen any time soon.

Until Next Time,

Justin Bennett

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Category: Gold

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.