Gold, the safe heaven metal, is not living up to its name for the last one month with prices correcting by more than $100 per troy ounce.
Gold touched a record high of $1,264.90 an ounce last month as investors turned towards the precious metal to protect against sovereign debt problems in Greece and Portugal , but Gold has failed to maintain those highs since then.
This fall can also be attributed to the major driving forces behind sharply surging gold prices; namely sovereign debt fears and high volatility in the currency market. The same factors which once drove gold prices are no longer strong enough to sustain the momentum.
However, this does not mean the worries that made gold prices gallop have just gone.
Even if it is assumed that the European banks that successfully passed the stress test have given a positive signal about their economy for the future, concerns linger on the back of the mind of investors.
This is logical as economic crisis that created turbulence cannot take the recovery mode overnight. Europe will take some more time to stabilise before it will actually starts picking up. In the mean time, even the smallest negative news will make gold move northwards quite sharply.
If we analyse the current scenario and price level, there are more factors that support gold prices than those which make it weaker. With the fears of sovereign debt crisis expected to resurface, people are looking for an opportunity to buy for a longer period. Besides, Chinese, Indian and Russian central banks are also buying gold at current price level on the expectation of rising global inflation.
Traditionally, gold is used as a hedge against inflation.
Although gold has broken its mid-term trend line which should ideally pull prices down to at least $1,125 but there are minor technical hurdles in the way to that level.
Every small support level is stronger than it looks as various fundamental factors are supporting the buying sentiments. One of them being the approaching festival season in India , the biggest consumer of the yellow metal around the globe.
The relatively lower price levels in India ? gold prices are currently pegged around Rs 17,650 per 10 gms, down from the highs of Rs 19,000 per 10 grams ? look quite inexpensive.
The jewellery demand in India rises during Diwali, followed by the year-end wedding season. Prices are expected to shoot up in this peak-demand season.
In the absence of any clue from the European nations, the market is now eyeing data from the United States . Positive jobless claims towards the end of July made gold extend its technical correction towards the month end but the fact remains that prices, even after clearly bearish on the technical front, are not able to sustain at the lower levels. With more positive data coming from the western markets, the increased risk appetite of investors will turn more funds towards riskier assets like equities and metals and out from safe heaven investments like gold.
Technical correction is quite evident on the charts with gold breaking the short-term trend line. It was a common belief that the current rally in gold was a bit too over stretched and the long-awaited correction started only after prices touched an alltime high of $ 1,266.5.
Currently, gold prices are taking support at 50% retracement level of the rally from the early February levels of $1,050 to the all-time high of over $1,200 seen towards the June end. A combination of technical and fundamental factors is surely going to bring back gold?s shine soon.