Gold ended its 10-year bull market in 2011 when it topped out at $1,900 an ounce. It was a spectacular run from $250 an ounce in 2001.
Since then it rallied back several times only to have those rallies fail at lower highs.
Its most recent rally attempt, beginning in January, looked to have a better chance of succeeding. On the technical side, gold was oversold beneath its important 30-week m.a. again, and it was rising from a frequently bullish double-bottom formation.
On the fundamental side, situations usually bullish for gold were on the rise at the beginning of the year. Several areas of global unrest were heating up again. The low gold prices had resulted in mining companies cutting back production, closing less productive mines, delaying exploration, and so forth. So a supply crunch was expected to put upward pressure on gold prices this year.
However, even as those situations worsened, particularly the areas of global unrest, gold’s attempts to rally this year ended even more quickly, and at even lower highs.
Gold is now approaching a critical juncture, at its lows of 2013, at just under $1,200 an ounce. Market technicians will be watching those levels closely. A break below them will put gold at new multi-year lows and in uncharted waters, likely to bring on more pronounced selling. With gold now down 36% since its 2011 peak, buy and hold investors may even be ready to give up if the last stand support gives way.
Gold bugs will have to try to hold that line.
It may be difficult. Our intermediate-term technical indicators remain on a sell signal.
Meanwhile, the stubbornly low inflation in Europe (actually concerns about deflation), and worries about the economic recovery in the euro-zone, has the U.S. dollar surging higher against the euro and most other global currencies.
That is a serious negative for gold if it continues. Gold tends to move opposite to the dollar. For instance, gold’s long bull market ended in 2011 when the dollar began what has now been a more than three-year dollar rally. And gold managed its 2013 rally only when the dollar declined temporarily.
By the way, the rising dollar may have implications beyond commodities priced globally in dollars, like gold and oil.
Investors should also consider the potential impact of the rising dollar on the earnings of U.S. companies with international operations. Profits in foreign country currencies will take a hit when translated back into dollars if global currencies remain depressed related to the dollar.
