Is Gold’s Near-Death Crisis Over-Exaggerated? Concerns of a Market Meltdown May Not Be

Is Gold’s Near Death Crisis Over Exaggerated? Concerns of a Market Meltdown May Not Be image Is Gold’s Near Death Crisis Over ExaggeratedIs Gold’s Near-Death Crisis Over-ExaggeratedCommodity prices have been heading lower on the charts.

In fact, it has been an awful few days for gold as prices plummeted, failing to reach $1,500 an ounce.

Prices dove right through support at $1,400 to $1,385.62 on Monday—the lowest level since 2011.

The shining yellow ore is in a bear market. Down 27% from its magical peak of $1,920 in September 2011, it has been nothing but turmoil for investors in the yellow metal.

As I said in a recent commentary, I have lost confidence in the metal as a safe haven investment at this point. I’m not even sure I would enter on the current weakness.

The price chart says “sell.” Follow the trend, and you may be able to squeeze out some profits on an oversold bounce trade; but extending the trend forward, things don’t look good for gold.

Now we will need to see if the precious metal can hold $1,400.

As we move lower, there are now concerns of a meltdown in the gold sector, especially if prices continue to trend lower toward the $1,200 level.

Goldman Sachs, which recently turned bearish and advised shorting the metal, is fearful of gold prices dropping to the $1,200-an-ounce level—as this level also represents the cash cost to produce gold at this point. (Source; Cosgrave, J., “The Scary Number for Gold Investors: $1200,” CNBC, April 15, 2013.)

The $1,200-an-ounce cost of production is clearly an issue, especially for the smaller mining companies that are not as cost-effective or able to survive a cash crunch, compared to the mid- to large-tier producers, like Newmont Mining Corporation (NYSE/NEM). (Read “Newmont—the ‘Best of Breed’ of All Gold Stocks.”)

Take a look at the chart below of the Gold Bugs Index comprising a basket of unhedged gold stocks; as such, this index is a good indicator of the movement of prices in gold due to the lack of hedging.

If you hold mining stocks that hedge very little, you could be in for more losses should prices fall, so check the company’s hedging program.

Is Gold’s Near Death Crisis Over Exaggerated? Concerns of a Market Meltdown May Not Be image HUI Gold Bugs Index AMEX stock chart$HUI Gold Bugs Index AMEX stock chart

Chart courtesy of www.StockCharts.com

Of course, the steady rise in the stock market has been a killer.

You can partly blame the Federal Reserve and central banks around the world for the easy money and associated movement of money into stocks.

In the chart below, notice the relative divergence (indicated by the blue lines) between the move of the S&P 500 since November 2012 and the downward slide of gold.

Clearly, the equities market and the yellow metal are moving in opposite directions, based on my technical analysis.

Is Gold’s Near Death Crisis Over Exaggerated? Concerns of a Market Meltdown May Not Be image GOLD Gold Spot EOD stock market chart$GOLD Gold Spot EOD stock market chart

Chart courtesy of www.StockCharts.com

I would be careful about entering into gold at this stage.

You could make some money on a quick trade if the metal bounces on the oversold condition, as indicated by the large blue oval in the chart above.

Of course, while you may want to lighten up your exposure to gold, you should also keep some gold, given the ongoing economic issues in Europe and tensions in North Korea.

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