What's Next For Gold?
Gold prices fell more than 2% in a straight decline on Wednesday after the market absorbed the Fed statement and the better than expected US economic data. The data was strong enough to further reduce expectations of a third round of quantitative easing (QE) by the Federal Reserve, which has now effectively been wrung out of the market. The FOMC statement was clearly positive about the economy which lead to a round of technical selling that hit gold prices hard and saw them fall to $1,634.09; the lowest since Jan. 16. The precious metal has now erased gains made since late January when the Fed said it would keep interest rates low for the next several years.
Gold appears to have lost its safe haven status as many investors now fear gold prices may continue to fall after dropping below the 200-day moving average. Gold prices could now test lows below $1,600. Many investors are now convinced it is the end of the road for gold and that we are now in a bear market but many of the key fundamentals for its significant gains have not disappeared.
The Fed may have given no indication of QE but that is only based on recent data, Japan has been printing money for years with no sign of giving up and it has only just begun in the Western world. Negative interest rates will remain whilst inflation is running higher than returns from the bank and protection from inflation is one of the biggest reasons to hold gold. Gold may provide no real return or dividend but when cash and bond returns are negative and gold is up 6 fold since 2001, it makes sense to own invest in gold.
With recent declines in the gold price we may now be reaching a point where we will see renewed physical buying from emerging markets, especially China and India; which would help stabilize prices.
Gold appears to be in a stage of consolidation and digestion. Gold has a habit of getting ahead of itself and climbing steeply, then pulling back sharply and digesting before reaching new highs, this happened in February 2008 and, of course, most recently in September 2011 when gold reached new highs. After February 2008, gold was in a digestion phase for around 18 months, this could mean that we may not see new highs for gold until autumn this year at the earliest. In the short term this means gold is likely to remain volatile and continue reacting to economic updates from the Euro Zone and the US.
Over the long-term gold may not be so easily manipulated, it's always the last standing investment: "people don't buy goldto make money but because they have money". Gold is purchased as a security against economic crisis and bad government decisions. At the moment the main factors driving demand for gold are the Eurozone crisis and Central Banks actions. When gold prices have finished consolidating these key factors, along with any changes in monetary policy and supply, factors are likely to send gold prices soaring.
Gold appears to have lost its safe haven status as many investors now fear gold prices may continue to fall after dropping below the 200-day moving average. Gold prices could now test lows below $1,600. Many investors are now convinced it is the end of the road for gold and that we are now in a bear market but many of the key fundamentals for its significant gains have not disappeared.
The Fed may have given no indication of QE but that is only based on recent data, Japan has been printing money for years with no sign of giving up and it has only just begun in the Western world. Negative interest rates will remain whilst inflation is running higher than returns from the bank and protection from inflation is one of the biggest reasons to hold gold. Gold may provide no real return or dividend but when cash and bond returns are negative and gold is up 6 fold since 2001, it makes sense to own invest in gold.
With recent declines in the gold price we may now be reaching a point where we will see renewed physical buying from emerging markets, especially China and India; which would help stabilize prices.
Gold appears to be in a stage of consolidation and digestion. Gold has a habit of getting ahead of itself and climbing steeply, then pulling back sharply and digesting before reaching new highs, this happened in February 2008 and, of course, most recently in September 2011 when gold reached new highs. After February 2008, gold was in a digestion phase for around 18 months, this could mean that we may not see new highs for gold until autumn this year at the earliest. In the short term this means gold is likely to remain volatile and continue reacting to economic updates from the Euro Zone and the US.
Over the long-term gold may not be so easily manipulated, it's always the last standing investment: "people don't buy goldto make money but because they have money". Gold is purchased as a security against economic crisis and bad government decisions. At the moment the main factors driving demand for gold are the Eurozone crisis and Central Banks actions. When gold prices have finished consolidating these key factors, along with any changes in monetary policy and supply, factors are likely to send gold prices soaring.