Gold's 20-day moving average falling below its 200-day and its brief foray into a bear market suggest momentum has turned bearish and a further pullback could be on its way.
Bullion's 20-day moving average (DMA) dipped below its 200 DMA on Thursday, in what technical analysts termed a death cross, as the short-term momentum has turned more negative than long-term trend.
That could show that the current downtrend is pervasive.
Death cross graphic: http://r.reuters.com/fax75s
2011 assets performance: http://r.reuters.com/xut75s
Any time there is a death cross, the market is telling us that the underlying strength has changed from bullish to bearish, said Adam Sarhan, chief executive of Sarhan Capital.
Sarhan compared gold's technical charts in December to a slow-motion train wreck, with the metal having plunged below its long-term upward trendline for the first time in three years and its key 200 DMA.
When you start seeing a lot more bearish technical events occurring, more and more shorter-term traders are inclined to selling their positions, Sarhan said.
Bullion has ended the year up 10 percent, but this was its smallest annual rise in three years and in the final three months of the year, it notched up its first quarterly loss since the third of 2008.
Spot gold rose as much as 2 percent to above $1,580 an ounce on Friday, but a day earlier they briefly dropped more than 20 percent from its record high of $1,920.30 set on September 6, flirting with the common definition of a bear market.
A negative crossover in moving averages can be seen as a selling signal, said Tim Riddell, head of ANZ Global Markets Research, Asia.
The last time a death cross clearly formed was in August 2008, following gold's sharp rally toward $1,000 an ounce. The metal then tumbled to around $680 an ounce in October 2008, just two months after its 20 DMA plunged below its 200 DMA.
The S&P 500 index also formed a death cross in August but it managed to quickly recover losses. Other markets such as the euro headed for steeper decline after the bearish formation.
The metal enters the new year on an uncertain footing and appears to have lost its safe-haven status, moving in tandem with equities and other riskier assets.
We think gold could struggle into the first part of 2012 and potentially drop into the $1,300 to $1,450 region, said Mark Arbeter, chief technical strategist of S&P Capital IQ.
Selling accelerated in December as hedge funds scrambled for cash to meet client redemptions and European banks trimmed their gold holdings to raise capital.
The latest data shows that investor bailout continues. Managed money's bullish futures position fell for a third consecutive week in the week to December 27, hitting its lowest level since early 2009, and open interest dropped to its weakest since April 2010, CFTC data showed on Friday.
(Additional reporting by Susan Thomas in London; Editing by Marguerita Choy and Josephine Mason)