Gold in recent weeks has declines sharply, dropping from around $1,675 at the beginning of February to $1,579 today, or by almost $100 per ounce/almost 6%. The chart for gold shows that the 50-day moving average is very close to crossing the 200-day moving average. Should the 50-day cross down through the 200-day, this would be a “death cross,” which is very, very negative. Apple formed a similar chart pattern back in late November 2012/early December 2012, when the stock was trading in the $580s. After the death cross formed, Apple continued its slide, falling to as low as $435 (currently it is about $450).
Although gold was as high as $1,800 an ounce, and its current price may make some gold bulls motivated to buy it, at just under $1,600 per ounce it is still inflated in my opinion. Gold was $800 per ounce not all that long ago, and the economic justification for its moonshot is a bit lacking. Normally a weak currency and high inflation drive gold prices up. We certainly have had a lot of pressure on the dollar, especially with the stimulus operations from the Fed. The threat of inflation is real enough, given this massive stimulus, although it hasn’t materialized as of yet (and probably won’t; at least not for a long time). Low interest rates and loose money policies typically result in higher inflation. However, interest rates, although at historic lows today, are already starting to creep up, even despite all of the government’s efforts to hold them down. The ten-year treasury yield recently moved back up above 2%, which admittedly is still very low, but this move is a strong indicator that bond holders are beginning to see the writing on the wall – that rates will move higher – and are therefore starting to sell. This selling is significant enough to more than offset all of the bond buying from the government, which amounts to about $85 billion every month.
If rates continue to rise, the threat of inflation, which has been the key driver for gold price increases (at least it has been the excuse traders have used to justify recommending gold and buying gold), will no longer hold water. The perception of the lessening of the risk of inflation has been enough to send gold down more than $200 per ounce from its highs. If the death cross is confirmed, just as we saw with Apple, we could certainly see gold fall significantly further. If we add to this a slowing GDP growth rate (-0.1% in the 4th quarter of 2012), the negative impact of the sequester cuts on the economy, the debt ceiling debate to come, unemployment that will likely rise above 8% again, European issues, etc., etc., it is easy to see how gold could fall dramatically.