Is it just me or is gold starting to lose its luster? After hitting as high as $1,900/ounce in late 2011, gold prices consolidated in 2012. Here are three reasons why the precious metal might slip down the charts in 2013:
1. Inverse Correlation to the U.S. Dollar
Back in 2011, I said that one reason why gold may rally was due to its inverse correlation to the dollar. With the spotlight shining bright on the Fed and its plans for QE3, gold rallied thanks to safe haven flows. Remember, traders treat gold as a hedge against inflation, so whenever it looks like the supply of Greenbacks and easy credit conditions may rise (possibly sparking inflation), gold prices tend to rise as well.
Fast forward to the present day. After launching QE3 and QE4 in late 2012, Bernanke and the rest of the FOMC would like to withdraw their bond purchasing plans by the end of the year if conditions improve, which was enough to spark this week’s dollar comeback. In turn, this could be bad news for gold bulls, as investors may begin to unload their positions in the precious metal.
2. Risk appetite on the rise
Taking a look at the charts, we can see that the euro, pound, and comdolls have picked up in recent weeks and have zoomed to new highs. With the U.S. government inching closer to a solution to the fiscal cliff, Greece being granted more bailout funds, and the Chinese government’s approval of infrastructure investments, we could see the risk trade pick up.
Of course, this doesn’t bode well for gold, as traders will go in search of higher yields. With the need for “safety” winding down, gold prices may take a hit.
3. Gold prices may be in for a correction
Just to put things into perspective, gold prices were sitting a shade above the $700/ ounce mark back in January 2009. At its peak in mid-2011, prices had more than doubled, topping out at $1,900/ ounce. That’s a 170% return had you just bought and hold!
That said, I think we could be in for a technical correction. Gold prices pretty much ranged in 2012, finding solid support at the $1,550/ ounce mark. With price now forming lower highs on the weekly chart, I wouldn’t be surprised if we see another test of support some time later this year. And if we see price close below $1,500, who knows how low price may fall!
So how exactly do gold prices affect the forex market? If you’ve gone through the School of Pipsology, then you would have learned in the Sophomore level that the Australian dollar and gold are highly correlated. With the prospect of a decline in gold prices, the Aussie may struggle to keep pace with its comdoll siblings in 2013!
But before you bet the farm and short the Aussie, you also gotta take into account the current fundamental outlook of Australia, as well as what the Reserve Bank of Australia plans to do with regards to monetary policy. Do yo’ homework and read up, my friends!