Gold continues to work lower as it moves ever closer to a region that has heretofore provided substantial buying support. Bears are attempting to take it down through this support region in the hope of picking off the rather large contingent of sell stops sitting just under the market.
It should be noted that they have strategically used the Chinese Lunar New Year holiday week to press their case. Without that strong physical offtake, speculators on the Comex have lost an important ally. It will be interesting to see what happens next week when that period in China is finished.
By then however, it may be too late for the bulls. This market looks heavy to me. Note that on the technical chart, one of the indicators that I still use ( it is dated but still a very good tool) shows that the ADX of the Directional Movement Indicator is beginning to turn up from a very low level. A rising ADX (the dark line) is a sign that a market is in a TRENDING PHASE. So far, gold has been in a sideways consolidation pattern or range trade. That is evident from both the price action which has been confined between $1695-$1700 on the top and $1640 or so on the bottom. Along with that, the ADX has been falling which is indicative of a market in such a pattern.
The danger for the bulls is if the support level gets taken out, the indicator is going to move higher indicating the possibility of a trending move lower. I am not sure how much downside gold would have under such circumstances but it is easy to envision it moving down to test psychological support near $1600 for starters.
Central Bank buying will no doubt arise should this occur but it will need to be large enough to offset the lack of speculative buying and the fresh shorting that will come from momentum based traders who want to chase the price lower.
Negative DMI has not yet taken out its previous peak but if we do get that support breach, it will. That will bring in more selling.
The problem for gold right now remains the same - the Central Bank money printing bonanza has convinced the majority of speculators that the worst is behind us and that the equity markets are the place to chase yield. Money flows are therefore leaving the safe havens (bonds included) and entering the equity arena. Until that substantially changes, gold is going to be looking for sponsors.
The onus is on the bulls to perform here and now.
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