We expected that the Cypriot fiasco would have little effect for gold and silver, but many gold bugs have given the crisis in Cyprus a great deal of attention; despite this attention the metals market has failed to rally out of its recent downward trend.
The absence of a rally in the underlying precious metals has resulted in mining stocks remaining relatively flat over the last few weeks, backing up our argument that one should not buy gold stocks to take advantage of the Cyprus fiasco. Last week we wrote about this at length, showing how improbable a rise in gold stocks as a result of the events in Cyprus was.
Many gold bulls believe that the events in Cyprus would lead to a great increase in demand for gold as a safe haven asset. This increase in demand would therefore push gold up out if its downward trend.
Although some speculative money has gone long gold, there has been no rally as a consequence. Now that a deal has been brokered, the fast money that bought gold will unwind positions just as quickly, especially with US employment data being released this week. It appears that the entire event will be forgotten just as quickly as it arrived, gold has remained unchanged and the S&P has continued to close on highs.
It is clear in recent times that the major driver behind rallies in gold has been the Fed’s response to poor employment data. The relationship has held both ways, with positive economic data resulting in the precious metals markets performing poorly. This means that with every solid employment data release, the likelihood of a rally in gold decreases.
Currently, the Fed is singing the tune of no more quantitative easing, and it would take a number of negative employment prints for that to change. The neutral monetary policy that the Fed holds at present makes it very difficult for gold to rally, and if economic data continues to be positive then the bull market in gold is well and truly over.
In addition to the current positive economic data and the Fed’s stance on future easing, we are approaching the “sell in May and go away” period of the year; traditionally weak for the gold market. Whilst April can seasonally be one of the stronger months for gold, May is not. This will be followed by the summer doldrums, where gold has traditionally failed or struggled to rally.
Gold is lacking a catalyst. That much is clear with Cyprus failing to push prices up, positive economic data and a time of seasonally poor performance approaching. However, we should examine the technical indicators of gold at this time.
At best, gold is technically weak. Since QE3 the RSI has been unsuccessful in staying over 50, and gold prices have been on a downward trend. Failing to make a push upwards and threatening to break support at $1550 shows gold prices are in poor health. When examining gold’s stochastics we can see that a downwards turn has been made, indicating a possible break downwards. The MACD paints no positive pictures for gold, as it appears that a bearish crossover could be made this week.
A deal reached in Cyprus, positive economic data in the US, seasonal weakness ahead, weak technical indicators; it’s hardly a strong bullish argument for gold. It is unlikely that gold could rally at this point, in fact it is unlikely that gold will maintain its current level if data in the US remains positive or neutral. Therefore one must recognise that the bull market may well be over for gold, and thus should look to how they can profit from the new market situation.
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