Gold futures prices started Wednesday under pressure as a rally in the dollar continued to erode the value of the yellow metal. Gold futures have also felt the pinch of investors looking to rotate out of alternative assets classes and back into stocks. As prices fell, Bullionvault Tweeted: “#Gold drifting in absence of economic collapse.”:
The 2013 rotation out of fixed income products and money markets has also created headwinds for precious metals and grains. Equity funds experienced inflows of approximately $70 bln during the month of January compared with $23 billion in all of 2012. Although the majority of the capital flows that made it into the equity market came from deposits, gold futures and ETF experienced negative capital flows.
The dollar continued to generate headwinds for gold futures prices, despite continued negative economic data points seen in Europe. Industrial production declined in the EU, reflecting the strength of a strong Euro. Wednesday Eurostat s reported that Eurozone industrial production rose 0.7% on the month in December, compared with a 0.7% monthly decline in November. On an annualized basis, output dropped 2.4% after a 4.0% decline in November.
An increase in the payroll tax in the U.S. insured that retail sales remained subdued putting pressure on purchases of gold at the retail level. According to the Department of Commerce, Retail Sales declined .1% in January, which was in line with economists’ expectations. Excluding automobiles, retail sales increased by .2%, which was slightly better than expectations.
Technically, gold futures prices remain under pressure and could experience liquidation on a close below $1,620. Implied volatility on gold prices has started to percolate after drifting lower for most of January.
Implied volatility (which is used to price options on futures) on the GLD ETF (which holds gold futures contracts) has moved to the upper end of the current range and likely will breakout to the upside if gold futures prices break down below $1,620. The recent prints of implied volatility near 10.5% in January were the lowest levels of implied volatility on gold futures prices seen during the past 52-weeks.
Momentum on gold futures prices has turned negative with the MACD (moving average convergence divergence index) generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the nine-day moving average of the spread. The index has moved from positive to negative territory confirming the sell signal on the MACD.
The RSI (relative strength index), which is an oscillator that measures overbought and oversold levels has moved below 40 and is now printing near 39, which is on the lower end of the neutral range. Given the RSI is not in oversold territory a breakdown in price action will not likely be met with strong support.