Gold: How Low Can It Go?

Gold’s slide

Unless you’ve been hiding under a rock, you’re probably already fully aware of gold’s extended slide. For the past 8 months, the yellow metal has been trading lower and lower and is now down about 28% from September’s highs.

But as they say, nothing lasts forever and everything comes to an end. How much further can gold drop?

I know that the metal’s drop seems unprecedented. However, you should know that this isn’t the first time that gold prices have crashed.

Way back when Pip Diddy was still rockin’ his dreadlocks, gold tumbled by 47% before bottoming out in 1976. What was amazing was that after its crash, the metal rallied for over three years, rising by about 721%!

In more recent years, we’ve also seen our fair share of action from the metal. For instance, in 2006, gold prices dropped by about 25% in just a couple of months. Then in 2008, it fell from a high of 1,032.90 and embarked on an 8-month slide to 682.20. That equates to a loss of about 33%!

Gold Monthly Chart

What lies ahead?

As I had mentioned in the past, there are two main factors that have contributed the most to the decline in gold, and in the short term, they’ll probably remain a drag for gold prices.

Central banks are being pressured to liquidate gold holdings in order to continue boosting their economies. Furthermore, with global inflation remaining subdued, gold has lost some of its appeal as a hedge against rising prices.

The bearish momentum on gold is currently very strong, so at this point in time, it’s hard to call a bottom.

In fact, just recently we learned that hedge funds have reduced their holdings of the precious metal by the most since February after the Fed announced its plans to wind down its asset purchases.

Meanwhile, surveys indicate that traders haven’t been this bearish for gold in over three years. According to a poll by Bloomberg, majority of analysts see gold tumbling once again this week.

But how low can it go?

Some say it might not find support until price drops to match gold production costs. If that’s the case, then it might mean that we might not see a recovery until gold hits 1,100 levels.

Market thoughts

Given the current market environment, it might not be a very good idea to pick out bottoms. Doing so in these bearish conditions would be a lot like catching a falling knife – very dangerous!

So how does this affect us forex traders?

Well, remember that certain currencies (such as the Aussie dollar) are heavily affected by gold prices. When gold is on the up and up, it usually takes AUD/USD along with it. Conversely, a decline is gold prices is usually met with a similar drop in AUD/USD. Hence, continued weakness in gold basically paves the way for further losses for the Aussie dollar.