Last year gold recorded its worst annual performance in more than three decades and the landscape for 2014 offered a significant upside, particularly with the Fed unwinding its asset purchases. For the first quarter gold buyers – private investors, funds and central banks- made an impressive comeback even at the point of overbuying physical gold at six-month high prices.
Reasons for gold buyers to be cheerful are three
With what we have now, and depending on the global economic environment, 2014 is most likely to be a rebalancing year: after a price correction, investors will again look at some diversification given the fact that equities are near record levels and running well ahead of their fundamentals, compared with the more fundamentally led outlook for gold.
Additionally, uncertainty surrounding US debt has the potential to draw some investment demand and hasten further diversification into gold as views on when the ceiling will be reached differ.
Finally, the prospect of a further modification in global monetary policies seems fixed to create further commotion in major currencies. Gold, of course, is not a currency, but more and more voices are heard arguing that it might as well be.
Gold buyers seeking support levels
The weight of the three factors mentioned above cannot be disputed, nevertheless there are other rather unsustainable influences that led to the unusually rapid upward movement of gold prices, the most important one being the Ukraine-Crimea issue. What started as a possible military conflict was then characterized as the beginning of a new Cold War, and now feels more like an energy crisis that primarily concerns Europe.
Gold’s rally hasn’t convinced Goldman Sachs that reiterated its $1,050 per ounce year-end target price for gold, which is about 17% below current levels. The firm believes that even though gold has been one of the top performers this year, unsustainable catalysts have driven the rally: three factors, namely Ukraine tensions, Chinese credit concerns and weather-impacted U.S. economic activity have played a role in pushing gold prices higher in 2014; Goldman Sachs sees these factors diminishing in the near future, which will prompt gold to tumble off current levels.
Despite the 2014 rally, gold has a long way to go from recapturing recent losses incurred in recent years as the precious metal lost nearly 30% of its value in 2013, its first drop in 13 years. Nevertheless gold’s technical upward trend is still valid so long as the $ 1,265 an ounce solid near-term support remains intact.
What is worrying at this point is that the correction in continuing with high volumes, especially below the $ 1,300 per ounce mark, which has now become a very strong resistance barrier. This practically means that there are a lot of eager sellers at these levers who do not believe that current prices will be sustainable, and sell expecting to buy cheaper later in the year.
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