Is the Bull Market in Gold Ending?

Fundamentals

After reaching all-time high prices in 2011, Gold bulls certainly don't have much to show for the rally as 2011 comes to a close, as prices have fallen over $350 from their highs. Not only has Gold begun to lose some of its "safe-haven" luster, but several key technical indicators look to be pointing to even lower prices at the start of 2012. Lead-month Gold futures are now trading well below the 200-day moving average, which is an important technical signal, as many traders look at where prices are verses this long-term moving average to gauge if a market is in a bullish or bearish phase. In addition, the uptrend line drawn from the key October 2008 lows was broken on Thursday for the first time. A weekly close below this trendline could lead to a bout of accelerated long liquidation selling. Gold prices are not getting much help from a resurgent US Dollar, which is normally viewed as a bearish indicator for commodity prices. It appears that the assets that were being moved into Gold due to concerns about Europe and its handling of the debt situation have started to find a home in other venues, such as US and German Treasuries. This has taken some buying interest away from Gold, despite much lower prices than those seen earlier this year, as investors now appear more willing to earn even meager interest from owning government bonds than they do owning precious metals that not only pay no interest, but are also a cash drain, as both storage and insurance on metal holdings must be paid. There is heightened concern for investors now that Gold prices have failed to make new highs, and those buyers who were late to the party are now seeing heavy losses to the value of their metal holdings.

Technical Notes

Looking at the daily continuation chart for Gold futures, we notice Thursday's sell-off below previous support at 1532.70 was short-lived, as prices received by the close cut the daily losses in half. This could spark some near-term bargain hunting buying, as long as Thursday's lows continue to hold. This is backed by the 14-day RSI, which has moved into oversold territory with a current reading of 27.93. If we look at the Fibonacci retracement from the October 2008 lows, we notice prices have not even retraced to the 38.2% level! This could potentially lead to further losses, with the 50% retracement not coming into play until the 1300.00 area. The most recent Commitment of Traders report shows speculators shedding over 26,000 net-long positions during the week ending 12/20. This was before the most recent price declines, and we should expect to see further declines in the net-long speculative position in this afternoon's report. Below this past Thursday's low, the next support point is seen near the 1478.00 area, with near-term resistance found at the December 21st high of 1642.10.

The unwinding momentum trade in gold:




The February gold futures contract is at $1,525.40, down $39/oz or 2.5%.

Some safe haven.

Limping into the homestretch of 2011, giving up it's rapidly fading positive YTD gains.  No one will speak positively about it, each bounce succumbs to the Law of Investors Getting the F*ck Out at the Same Time that Benjamin Graham may or may not have written about, I simply cannot recall.

If you loaded up at the peak of the Europe crisis this fall, do yourself a favor and reevaluate if the metal is still acting the way you expected to.  Nothing worse than getting the thesis right but screwing up the trade expression.  Gold is not a f*cking deflation hedge, no matter how badly you want it to be.

Meanwhile........

Chinese Central Banker Declares That 'Gold Is The Only Safe Haven Left'

China is making an even bigger move toward gold in reaction to money printing around the world (via @JamesGRickards).

People's Bank of China official Zhang Jianhua declared yesterday: "No asset is safe now. The only choice to hedge risks is to hold hard currency - gold."

Zhang, the bank's research director, recommended buying the dips: "The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation."

China's $3.2 trillion in foreign reserves are currently invested one-third in U.S. treasuries 20 percent in euro-denominated assets and only 1.8 percent in gold, according to China Daily. China has one of the world's biggest gold reserves at 1,054 tons.