Home > Economy > Fiscal Cliff Worries Send Gold Sharply Lower

Fiscal Cliff Worries Send Gold Sharply Lower

November 29, 2012

Gold prices plunged this morning, dropping more than $25 on concerns that U.S. lawmakers will not reach an agreement on spending cuts and tax hikes in time to avoid the “fiscal cliff”.

Technically, the market had been having trouble at a Fibonacci retracement level at $1750.00, but there was on indication that a sharp break was in the making. The charts indicate that a test of $1706.00 is likely, but a break through $1704.50 will change the main trend to down on the daily chart, signally a serious shift in investor sentiment.

Some reports are surfacing that the size of the break is being attributed to a technical glitch due to the rollover from the December to the February futures contract, but this hasn’t been substantiated. For several months, gold has traded without a true identity. At times it trades like a reserve currency, but other times it reacts like an investment.

A typical gold market reacts positively to uncertainty, but the current action suggests that investors are more comfortable moving money in the safety of the U.S. Dollar.

The EUR/USD also finished lower. Not only did the uncertainty over the resolution of the U.S. fiscal cliff pressure the market, but the inability of the Greece bailout plan to provide clarity for traders also led to renewed selling.

Technically, the daily chart suggests that a break to 1.2834 may be necessary to relieve the market of overbought conditions. Since the main trend is down, there is still a question as to whether a test of this level will generate any true buying interest.

The short-term, counter-trend rally in the GBP/USD also appears to be over with the Forex pair failing to take out any significant resistance levels. The technical picture suggests a pull-back into 1.5900.

The charts also indicate that the recent rally in the Sterling against the dollar mirrored the rallies in the Euro and the U.S. equity markets. This is a strong indication that short-covering and demand for higher risk assets were the driving forces behind the rally. Some investors were suggesting that the U.K. economy had turned the corner, attributing to some buying interest, but the currently developing break indicates that investors are still bearish the currency.

January crude oil was hit hard on Wednesday in conjunction with the strong dollar and weaker demand for higher risk assets. Although the market remains range-bound between $84.00 and $90.00, today’s break under a pivot price at $87.10 indicates that there is a strong bias to the downside.

Worries that the U.S. fiscal cliff will send the economy into a recession hurt the market today. With supply at high levels, a recession would mean lower demand for oil, putting further pressure on prices.

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