Although gold (NYSE:GLD) closed out 2011 on the verge of a complete meltdown, the new year also has meant new life for the precious metal. The gold bulls got a jump right out of the gate as soon as the calendar was flipped, and despite a tough March, gold’s still up for the year.
But what’s next for the struggling yellow metal, technically as well as fundamentally? The worst might be over … or at least, it should be over.
The good news for gold bugs: The value of the yellow metal jumped 13.8% during the first two months of the year, unwinding the threat of a breakdown in December of last year. Gold futures were knocking on the door of a major long-term support line on Dec. 29, but the bears didn’t even come close to taking advantage of that opportunity when they had it.
Click to EnlargeThat long-term support line (orange) is intact, and unless it actually fails to act as a floor, gold still has a chance of pulling itself out of this semi-bearish rut before things get out of hand.
The bad news for gold bugs: The metal has lost 6.5% of its value since the late-February peak, and isn’t exactly looking like it wants to recover anytime soon. All the other key moving average lines are bearing down on gold, too.
Fundamentally speaking, though, gold might well have enough fuel to punch through any of its current ceilings.
The opinions continue to vary widely, but the majority of them have been gravitating toward the recent middle, where things are currently priced. And the tepid outlooks make pretty good sense.
UBS, for instance, has dialed back its expectation for an average price of $2,050 this year to $1,680 — right around where it is now — because the economy continues to show signs of improvement. That economic strength means investors will feel less of a need for a safe haven like gold. The three-month (second-quarter) UBS price target now stands at $1,600.
Goldman Sachs is slightly more bullish in the near-term, expecting gold to reach February’s peak prices around $1,790 again before the end of Q2. The reason? A forecast for more subdued economic growth fueled by more Fed easing (though apparently not enough to induce strong inflation).
Either way, the average consensus for gold still says it’s going to be trading at $1,900 by the end of the year. The data jives with that idea.
Take recovering demand from India, for instance, which is the biggest single-country buyer of gold (China is the biggest consumer, but it mines most of its own gold). India’s gold demand is poised to rebound again now that the country’s gold fabricators have gone back to work following a strike. The protest was in response to nearly a doubling of the country’s gold import tariff, which has since been whittled down to a duty of only 4%. Not only will this new tariff not stifle demand, but the return to work for India’s jewelry-makers after a two-week hiatus is expected to mean a short-term pop in gold demand as they make up for lost time.
Also, there’s some relatively convincing expectation that the recent rise in volume of gold futures contracts — while gold was on the way down — isn’t necessarily an indication that new bearish bets are being placed. Rather, it’s an indication that some major speculative positions were being unwound.
The plunge in open interest levels confirms the suspicion. While trading volume has been on the rise, open interest has been shrinking considerably since early March. The phenomenon of rising trade volume and falling open interest most likely means long contracts have been dumped, as was the case back in late 2009 — right before a very big rally. In fact, open interest as of the end of March of this year was right in line with that seen in September 2009, suggesting the door for a rebound is comparably open.
The bigger-picture consumption of gold, after all, still hasn’t actually slumped … just gold’s price.
Gold still has some technical hurdles to get over if it’s going to dole out a bullish second quarter and reach its targets. Namely, a whole zone of resistance between $1,688 and $1,709 needs to be cleared. Past that, it’s blue skies. The bigger uptrend, backed up by a bullish fundamental undertow, implies there’s more Q2 upside than downside with the world’s most precious of metals.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.