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Whether gold has intrinsic value is a matter of much dispute, to say the least. But no matter what your view, one thing is clear: the day-to-day movements in the bullion price are determined primarily by technical factors. And the news this morning that the gold price is showing the Death Cross, arguably the most bearish of all technical signals, is not good.
The Death Cross is the term used for when the 50-day moving average crosses below the 200-day moving average. In gold's case, the 50-day level fell below the 200-day average of $1,666 overnight. For the technically minded, this means that the longer term upward trend, as represented by the 200 day, is exhausted and the short-term sign – the 50 day – has paved the way for a sharp, painful correction.
Where gold is concerned, there's no shortage of reasons for investors to argue interminably. But outside of the monetarily theological issues, the biggest problem for all investors in the sector is that there are no fundamentals that signal gold is either expensive or cheap. Individual equities can get bludgeoned by the market to price earnings levels indicating compelling value, but there are no such signs for gold.
As we noted recently, the historic inverse correlation between gold and the U.S. dollar – the traditional way to gauge whether gold was cheap or not – has largely broken down. If, as the Death Cross suggests, the technical picture for gold has eroded, there's little in the way of a valuation floor to keep the price from plunging.
All, however, is not lost for the gold bugs. Global central banks in the U.S., Japan and China, to name just three, have embarked on strategies of extremely loose monetary policies which in theory should push bullion back up. But in the short term, the importance of technical analysis in determining the gold price can't be overlooked. Investors in the sector should brace themselves for volatility.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB .
Scott Barlow