Gold Gets a Black Eye

 | Mar 15, 2012 | 1:30 PM EDT
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The gold bulls were struck with two strong fundamental body blows Tuesday afternoon that produced fresh, serious near-term technical damage on the charts. The yellow metal was still trying to recover from the price swoon seen in late-February and early-March when this week's unexpected downdraft took April Comex gold futures to a fresh two-month low of $1,634.70 an ounce. On Feb. 28, gold had hit a three-month high of $1,792.70, basis the nearby April contract.

Tuesday afternoon's statement from the Federal Open Market Committee of the Federal Reserve threw fresh cold water on ideas that the central bank would initiate another round of commodity-market-bullish quantitative easing. The Fed statement said the U.S. economy is improving and that inflationary pressures remain minimal.

Gold prices started to drift lower when the FOMC news was released. However, the selling pressure picked up major steam when, just a bit later that afternoon, JPMorgan Chase (JPM) came out with a dividend announcement following its successful passage of the latest government-imposed financial stress test.

The FOMC and JPMorgan news combined to pump fresh trader and investor confidence into the marketplace, which put strong downside price pressure on the perceived safe-haven asset that is gold. Evidence of the marked change in investor sentiment -- the same change that produced such strong selling pressure in gold -- can be better gauged by the actions of the safe-haven U.S. Treasury market the past two days. U.S. T-Bond and T-Note prices have plunged sharply and hit multi-month lows.

The U.S. dollar was also boosted by the double-barreled blast of investor confidence Tuesday. The dollar index, which is a basket of six major currencies weighted against the greenback, hit a fresh two-month high in the wake. A strengthening greenback typically acts as another bearish weight on the gold market: Market history shows gold prices and the dollar index tend to trade in an inverse relationship.

This week's selling pressure in the gold market did produce near-term chart damage, as a two-week-old downtrend is now in place on the daily chart for April gold futures. For the empowered gold bears, the next downside target is under psychological support at $1,600. For the gold bulls to gain any fresh upside near-term technical momentum, they would have to rally April futures prices above strong chart resistance at this week's high of $1,717.40.

The staunch gold bulls can correctly maintain that the more important longer-term price trend in gold remains upward, as has been the case for the past 11 years. They can also correctly argue that, so far, this latest downside move in gold is just one more "correction" in the existing longer-term price uptrend. Before we'll even see a dent in the longer-term bullish technical posture of nearby gold futures, they would need to sink below major longer-term technical support at the $1,500 level.

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