Fundamental & Technical Outlook: Is Gold Losing Its Appeal?

Fundamentals

Gold futures have fallen over a hundred dollars since peaking at over $1,000 an ounce three weeks ago, and traders have begun to wonder if the precious metal has lost its appeal as a safe haven. One driving force behind the sell-off has been the overwhelmingly bullish sentiment among smaller speculators, which is generally viewed as a bearish indicator, much like an overbought reading on the RSI. Additionally, inflationary pressures have not been there to support prices like they were in May of last year when Gold first traded above the $1,000 ounce mark.

The Commitment of Traders report continues to show a large speculative long position, suggesting traders may be fearful of getting stuck in long positions in the event that some of these longs decide to liquidate positions. Investment in the SPDR Gold Trust (GLD) remains very strong, setting a new record of 1,038.17 metric tons.

Positive news from the financial sector also has weighed heavily on prices in recent sessions, although traders must question whether the entire banking sector will return to profitability. Citigroup (C) may have posted an $8 billion profit, but they received $45 billion in bailout funds. With that type of inefficiency, the bank should become a branch of the federal government!

How will banks that did not receive a substantial government infusion fare? That is the million dollar question, so to speak, with the unbridled enthusiasm likely to quickly dissipate if other banks don’t follow suit. There are still more question marks rather than answers regarding the economy, which could benefit Gold prices.

Technicals

Turning to the chart, April Gold has come down to the trendline formed by November, December, and January lows. It is imperative that the trendline remain intact for the market to maintain its upward momentum. Prices have also bounced back from support in the 890 area. A violation of this support level could signal the end of the uptrend in Gold prices, and the market risks falling back into the lower 800’s.

On the upside, prices would likely have to cross through the 945.00 level to regain positive momentum. The market quickly snapped back yesterday after closing below the 50-day moving average on Tuesday, which can be seen as somewhat positive.

The momentum indicator continues to nosedive, despite the April Gold contract trading higher for the second session, which could be troubling for bulls. The indicator has crossed below the zero line and is showing bearish divergence from prices, which can both be viewed as negative.

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