Gold gets more than its share of attention when prices are rising. This is particularly true when key technical levels are in sight or being breached, as well as psychological barriers like US$1000 per ounce that was broken recently. But with spot gold now heading toward US$900, the latest decline warrants some analysis too.

Each of the past two declines in November and January were limited to 10% before the uptrend resumed, according to Ashraf Laidi, chief market strategist at CMC Markets in London. He noted that since November, gold did not fall below its 50-day moving average.

Meanwhile, Mr. Laidi told clients that the latest retreat remains within the upward trend, suggesting support is holding at US$890. He added that only a breach below US$887-888 will cast serious doubt on the current bull run.

“If there’s one singular reason gold is unlikely to repeat the October selloff is that today central banks are either at or on their way to quantitative easing (Fed, BoE, BoJ & BoC), followed closely by the SNB,” the strategist said.

A number of factors have contributed to gold’s decline in the past week or so, according to Jeffrey Nichols, managing director American Precious Metals Advisors and NicholsOnGold.com. The market has had to absorb a large amount of old scrap as record high prices in local currencies around the world – along with falling income and rising unemployment – has prompted many people to cash in their old gold jewelry.

“The combination of rising prices, growing secondary supplies, and surging investment buying created a simply unstable and unsustainable situation as higher prices attracted ever-greater volumes of scrap to be absorbed by investors,” Mr. Nichols said in a report on Tuesday. “Only an ever-increasing volume of investor purchases could keep prices near US$1000 an ounce. As investor buying relaxed, prices just had to come down.”

When gold stalled above the quadruple-digit mark on Feb. 20, the short-term technical picture appeared to turn bearish – selling begot more selling. Mr. Nichols sees good support between US$900 and US$910 per ounce, but said a breach below this level could take prices down to US$850 “in a wink.”

“It’s important for gold-market participants to remember that long-term trends are always rational but short-term volatility is often emotional and sometimes just meaningless noise,” he added. “Although we remain bullish for the long-term and foresee more than a doubling of the gold price in the next few years, the immediate picture is less rosy... and the yellow metal remains vulnerable to further short-term selling.”

Mr. Nichols also noted that a pop in the greenback could knock gold down further if anticipated rate cuts from the European Central Bank this week are not already fully reflected in financial and currency markets.

Since China’s trillion dollar cash hoard is largely made up of U.S. Treasuries, John Ing, CEO of Maison Placements Canada, suggested it could protect its reserve position by buying gold with some of its U.S. dollars.

“Gold is denominated in dollars and such purchases would protect China against a declining dollar,” he said.

Mr. Ing also thinks President Obama will be good for gold but bad for the greenback as he “inflates the costs of debt away.”
“We continue to believe gold is the antidote to our problems,” he said in a recent report. “Gold will continue to rise in value as long as the United States keeps printing more money than the economy can use.”

Calling gold the new currency and predicting prices will hit US$2000 in 2009, Mr. Ing suggested that with the U.S. holding 261 million ounces of gold, the Federal Reserve could issue gold-backed debentures as a means to create liquidity and trust in its troubled financial system.

Jonathan Ratner