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Gold loses its shine

Precious metals prices have fallen through key support levels, spelling trouble for gold and silver miners
February 20, 2013

Gold and silver prices have broken through key support levels and are seemingly heading back to major support areas around $1,520 (£955) an ounce and $27 an ounce, respectively.

Long futures positions in gold have been drastically cut in New York, according to data from the Commodity Futures Trading Commission, while total short positions have jumped markedly higher.

Despite climbing to nearly $1,800 an ounce in early October in advance of a third round of quantitative easing in the US, gold couldn’t quite reach the new heights expected of it once central banks actually turned on the electronic printing presses. Instead, the yellow metal drifted indifferently down to around $1,650 an ounce - until a sharp bout of recent selling brought gold to its current level around $1,610. From a near-term chart perspective, there is some support at the psychologically important $1,600 an ounce level, but that is expected to be breached sooner rather than later.

All of which begs the question, why has gold's run come to an end (at least for now)? Analysts from Citigroup - who have had a good record lately of forecasting bearish movements in metals prices and mining-related equities - argue the key drivers of the gold price have been weakening since QE3. "We believe the world has passed its worst point of systemic risk to the global financial system and that the 'insurance metals' (gold and silver) have had their day in the sun." That's because the global economy is seeing early signs of a return to growth - albeit very minor growth at this stage, admits Citigroup - while bond purchases by the European Central Bank have curtailed the worst of the eurozone debt contagion. Likewise, the US dollar is being underpinned by cheap energy supplies from fracking for shale oil and gas, so the long-term-bearish argument on the dollar has reversed somewhat. Nevertheless, bullish precious metals speculators might argue gold's recent fall is only because the market is less concerned about systemic global financial risk, not that the risks themselves have diminished.