Gold futures made a major reversal during last week's trading as massive fund liquidation sent the entire commodities complex spiraling downward. This weakness is seen as a sympathy move with the global retreat in share prices that have set most stock indices near their lows for the year, combined with fears of a return to recession in Europe and the US.
Gold and the rest of the precious metals sector has been benefitting tremendously throughout the economic recovery, as central banks opted to flood the system with newly printed money to shore up banks and encourage growth. This has been perceived as an inflationary pressure in the long term, and has led to uncertainty about the long term stability of the major world currencies. Investors have reacted accordingly to drive gold to all-time highs just shy of $2,000 per ounce.
The fear that the stimulus-led recovery has not materialized is leading traders to move out of hard assets with expectations they could plummet in similar fashion to the 2008 collapse. The end of Quantitative Easing by the Federal Reserve has further encouraged this belief as it removes a major source of liquidity which has been helping prices rise over the last two years.
While the long term bullishness in precious metals remains intact (the likely course of action by central banks will be to increase stimulus efforts by renewing their money printing activities and further debasing their currencies), the knee-jerk reaction to the pessimistic outlook has led to a $300 per ounce drop in the price of gold. Friday's session saw a record $100 per ounce drop before a minor recovery at the close.
Despite the steep decline, technical support for gold remains intact. The nearby futures show a Channel Down chart pattern on the 30-minute time interval. This channel may provide a temporary trading range for the week ahead, as the action consolidates and awaits long term direction from the broader markets.
A move below Friday's low would trigger a downside break from this channel and do more significant damage to the chart. A move above channel resistance at $1,710 would likely draw in speculators buying the price break in anticipation of eventual new highs.
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