Have Traders Seen End of Bull Market for Gold? Not Necessarily

Gold was disappointing traders so far as it was falling since October and any bounce could be considered a bull trap, hurting anybody who has tried to buy the metal on hope that it would regain its strength. Gold demonstrated especially big drop last week as the Federal Reserve’s minutes caused concern among traders that the US policy makers may end the asset purchase program sooner rather than later. Did gold market end its bull phase or there is still hope for the precious metal?

Kitco News’ weekly gold survey showed that most analysts remained bullish on gold and cited Ralph Preston, principal with Heritage West Financial:

The market may very well test $1,525-$1,530 monthly support, but I suspect that it will bounce and hold those levels and essentially close next week unchanged.

The Commitments of Traders show that there are still more gold bulls than bears, though the number of former is falling, while the number of latter is rising.

Indeed, there are many economists who think that the market reaction to the Fed’s minutes was much exaggerated. It is hard to believe that the US central bank will drop stimulus while there are quite a few unfavorable macroeconomic indicators. This week is busy with plenty of economic reports, most notably the fourth quarter GDP figure, the economic sentiment report and the housing data. If these indicators turn out to be negative, chances are that traders will again believe in stimulus from the Fed, bringing gold prices higher. Perhaps even more important is the two-day congressional testimony of Fed Chairman Ben Bernanke that will start on Tuesday. Bernanke may give hints if he thinks that the accommodative policy should be dropped (very unlikely in truth) or he still prefers to support the US economy with monetary easing. Automatic budget cuts that should kick in on March 1st are another important factor that will affect the market.

The situation in Europe also remains important for bullion as it will likely advance if there are signs that the region is on track to economic recovery. By the same token, any signs of trouble will undermine the euro and boost the dollar, subduing gold prices. This week’s Italian election may have a strong impact on the market, depending on how traders will view its outcome.

There is also hope for demand from Asian nations. It looks like China’s economic growth has bottomed out and stabilized, giving reason to believe that consumption in the country will grow steadily. Some experts also talk about Indian demand as the potential major reason for being bullish on gold, but here things are more complicated. The Indian rupee is falling in value, reducing buying ability of Indians. Furthermore, the Indian government considers raising import taxes yet again to trim inflows of the metal into the country. Of course, most specialists believe that official ban of imports would only increase the amount of illegal traffic of gold.

As another positive factor for the precious metal, the huge slump of gold prices can be bullish by itself as it should help physical demand as well as attract investors as a good buying opportunity.

All in all, it is too early to think that gold has completely lost its appeal and has no chance to recover. The Thomson Reuters GFMS Gold Outlook was rather optimistic, promising a rally to $1,700. It is important to note that the outlook was released before the recent events and did not take them into account. Yet fundamentals did not change that much and the reasons for optimism, described in the forecast, for the most part remained the same. As for the negative scenario, DailyFX warned that a break below $1550 may result in the metal testing the May 2012 lows at $1527 and $1483.

If you have any questions and comments on gold today, use the form below to reply.

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