The gold market is down in early action Thursday and down hard. Spot prices are lower by some $42 per ounce as futures traders play the short side of the market. The selling has taken prices well below previous resistance at $1800 and thus far the $1750 area is holding the bears in check.
Another failure by gold to break through resistance in the $1830 to $1840 area may not bode well for the bulls. This lack of upside follow through may cause the bears to come out in force, while forcing many of the remaining bulls to throw in the towel. Such a scenario could, in turn, lead to a fresh leg lower in price that could see gold move all the way down towards the $1600 area.
The sell-off in gold today is causing major chart damage that could fuel further technical selling. The trend reversal lower could set the stage for additional sellers to enter the market. Any rallies are now likely to be sold into rather than bought into and the bulls will need to prove their metal before attracting more buyers.
Not only is the gold market suffering technical damage, but the fundamentals may also be deteriorating. Recent economic data suggests the economy is continuing to improve and could give the Fed reason to reign in its stimulus measures. Not only this, but inflation data released recently may also suggest that inflation could prove to be transitory. A lack of ongoing inflationary pressure may keep the pressure on gold as well and could lead to further selling pressure.
Today’s release of retail sales data is a prime example of how a stronger economy may affect the gold market. Retail sales came in stronger than expected, up .7% last month. This figure was a strong reversal from the previous month’s figures which showed a decline of 1.8%. Although gold was already trading down steeply, the yellow metal did remain near the session lows following the retail sales data and has been sharply down since. The data may be supportive of the viewpoint that the Fed will look to begin tapering its monthly asset purchases sooner rather than later.
Adding insult to injury, the latest release of the Philadelphia Fed Manufacturing did not help gold, either. The index rose to 30.7 in September, while estimates were looking for a decline to 18.8. With manufacturing in the region remaining strong, the Fed has even more reason to consider tapering this year. Less stimulus action by the central bank may be bearish for gold and could lead to a fresh wave of selling interest entering the market.
The weeks ahead will provide further clues about the state of the economy and what the Fed is likely to do or not do. As these clues become available, volatility could rise in the gold market as participants adjust their expectations. For the time being, however, the bears now appear to have an edge in the market and could inflict further damage in the sessions ahead.