Gold’s so-called death cross is not its only problem

February 20, 2013, 1:15 AM

 http://blogs.marketwatch.com/thetell/2013/02/20/so-called-death-cross-is-not-golds-only-problem/

The week is not going well for gold, again, and that’s after some had predicted China might start jumping in after leaving gold on its own last week during the Lunar New Year celebrations. (See Could China ride to gold’s rescue?).
Gold  GCJ3 -0.01%  was down $24.10, or 1.5%, at $1,580.10 an ounce on the Comex division of the New York Mercantile Exchange, adding to losses as the session progressed. Read more on gold trading.

Part of the decline was possibly due to the fact that the 50-day moving average was getting close to slipping below the 200-day moving average. In some views, say a 5-day chart on FactSet, the 50-day had already fallen below the 200-day. The cross of these two trend lines can foreshadow more losses in some markets; there’s a fairly substantial body of analysis devoted to how the S&P 500 SPX -0.66%  trades after its moving averages engage in a death cross, for instance. In the simplest terms, when the near term view of an asset looks worse than a medium term view, bad times are ahead.
Read Need to Know: 7 gut checks before the stock market’s opening bell.
Here’s the tweet that fed chatter about gold’s dark omens.
Now to the devil in the details of the death cross, so to speak.
According to Ole Hansen, head of commodities strategy at Saxo Bank, a death cross only happens when both averages are heading south and touch on the downside. “At the moment the 200-day moving averages has been flat and the 50-day has been pointing slightly upward, so it’s not a death cross in its true definition.”
He says that the so-called death cross has only occurred about three times in the last few years, most recently last April when those averages crossed at around $1,675, which led to an 8% drop in prices. Another cross that happened back in 2008 was much worse, triggering a 16% drop. But these crosses and such threats can drive sentiment, which is already weak for gold right now.
“I wouldn’t call this the end of the rally. Looking at recent history, though it has created some extended moves when these crosses take place,” he said.
But still, he says, the term death cross will get batted around and make it to newspaper headlines, potentially scaring more investors away from gold, possibly draining money out of ETFs like SPDR Gold Trust  GLD +0.93%  which is down about 5% so far this year.
“Just the fact we’re talking about it means that others who are following it … will be reading the headlines. ‘We have a death cross.’ They’ll play it safe, and that obviously in itself has got the market on the run.”
Hansen says there are “increased amounts of naked short sellers in the market” and sentiment is extremely vulnerable.
On a technical level, gold is within $10 of the first level of significant support, he says. The first proper test of whether these levels are attractive enough to bring in buyers will be $1,582. If gold takes that out, it heads back to lows going down to $1,525. On the upside, gold needs to regain $1,625 and then get to that 200-day moving average of $1,666, he says.
Of course, Hansen says gold bugs shouldn’t feel so bad because the entire commodities sector outside of crude oil is in the dumps right now. And that’s mostly down to the fact that investors are preferring stocks right now. “We need a shakeout in the stock market for sentiment to change,” he said.
One more piece of disappointment for gold has recently come from China. On Monday, the government announced it wants to drain liquidity from local money markets for the first time in eight months. That keeps a lid on inflation and demand limited for gold as an inflation hedge, says Hansen. Read more on China’s money-draining moves.
Gives new meaning to the term “liquid gold.”
– Barbara Kollmeyer
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