Why Is Gold Falling?

I’m sure there are many investors that are concerned by the fall in the gold price, and just as many that are wondering how an asset that is traditionally a safe haven could be falling at a time of such market turmoil.

The initial trigger for the selloff was the press release put out by the FOMC, or Federal Open Market Committee,  in which they issued their assessment of the US economy. The press release stated that the FOMC saw “significant downside risk” to the economy and it was this phrase that seemed to trigger a change in sentiment in markets around the world.

Until recently investors had been expecting a slowdown in global growth but nothing much more. Now however market participants are beginning to realise that what we are facing is likely something much worse and when the special two day Federal Reserve meeting failed to deliver QE3 traders and investors went on the defensive.

This lack of aggressive stimulus was coupled with a lack of decisive action among leaders in the eurozone and as a result markets began to price in a certain Greek default and a debt contagion across the European banks. At the same time the news came out of China that for the third consecutive month Chinese manufacturing had actually slowed.

All of this combined to produce a huge selloff in all risk assets as investors rushed for the exits. During these mass asset liquidations traders and investors receive margin calls and are forced to raise cash. As a result they are forced to sell anything that’s in profit and given that the broad equities markets and the commodities complex are in negative territory for the year they are forced to sell the only thing that is in profit, i.e. gold.

So the huge selloff in gold is being driven by liquidation in the paper futures markets and has nothing to do with fundamentals. In fact in the physical market we are seeing strong buying as the smart money takes advantage of lower prices.

The question for investors is, where will gold find support? My guess is that gold will bounce at around the 150-day moving average at around $1,570. Gold did puncture the 150-day moving average back in 2008 when we also saw liquidity driven selling.

 

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