Last week gold registered its worst weekly performance for 2012 after a sustained rally in January and most of February.
The Dubai Chronicle argues that this week would be a crucial test for the yellow metal – a significant break below the $1,700 level could trigger a major sell-off.
"Failure to stem the selling pressure" represents a major problem for the gold market given gold's trading behaviour in 2011 and if it should breach the technically significant $1,631/oz level, all bets are off says the Dubai Chronicle.
Gold futures ended last week in New York close to $70/oz or over 3.5% down at $1,710 an ounce.
The Dubai Chronicle cites four major reasons for the weekly decline:
- The US Fed's signalling that the chances of further monetary policy easing through a third round of quantitive easing is remote
- The new funding model adopted by the European Central Bank that "favours increasing risk, therefore shunning safe haven plays"
- Lack of investor demand after a sustained rally on declining volumes
- A rise in the value of the US dollar
Trading in gold futures has become more volatile recently and many traders and analysts say bullion's failure to break through $1,800/oz represents a major setback for the prospects of the precious metal.
The last time contract gold settled above the $1,800 an ounce mark on September 20 it shortly thereafter shed more than $100 over just a few trading days.
That was not the first time traders got cold feet after breaking an important psychological level.
A similar pattern was followed in the days after gold futures hit a record high above $1,900 an ounce in August. The yellow metal fell precipitously two days after hitting the record, losing $105 or 5.6% in value in a single day.
In 2011 trading in gold was the most volatile since 1980, with the gap between the year’s highs and lows coming in at close to $600 an ounce or a 32% range. In 1980, when gold hit a record $850 an ounce, the spread was even greater at more than 40%.