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What Could Send Gold Into a 'Major Tailspin'

Wednesday, 3 Apr 2013 | 11:02 AM ET
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The price of gold has struggled to get going lately, having suffered two back-to-back quarters of losses, but the technicals now suggest that the precious metal could be sent into a major tailspin.

The yellow metal broke major support below the $1,590.4 level on Tuesday, and in doing so, traded to a low of $1,574 an ounce. With the momentum completely to the downside, Tuesday night's session opened up with the market trading lower and reaching a low of our $1,563.1 (our target) before consolidating and settling back towards $1,570.

(Read More: Gold Slides as Haven Appeal Dissipates)

Lately, the price of gold has been influence by any number of factors, including geopolitical events, monetary policy on the part of central banks around the world and more.

Early in Tuesday's session, gold struggled to hold the $1,600 level, but European economic data came in worse than expected, the U.S. dollar index traded higher.

The Bank of Japan has begun a policy meeting, in which they are discussing their plans for aggressive monetary easing.

Meanwhile, Societe Generale analysts recently grabbed headlines with a note entitled, "The End of the Gold Era."

(Poll: Is the 'Gold Era' Over?)

At the same time, Europe returned from a four-day holiday, in which money hit a safety trade (gold), and upon return, looked to move back in equities.

Finally, U.S. private employers added 158,000 jobs in March on Wednesday, falling short of economists' expectations for a gain of 200,000, according to payrolls processor Automatic Data Processing. February's private payrolls figure was revised up to an increase of 237,000 from the previously reported 198,000.

(Read More: Work Slowdown? ADP Says Job Creation Declining)

The ADP report comes ahead of the widely-followed government non-farm payrolls report, due Friday. Economists expect to see a gain of 200,000, with the unemployment rate steady at 7.7 percent, according to a Reuters poll. Either way, the number will surely move the markets.

Still, the technicals should be pretty clear. Gold slowed down just below the $1,577.2 level (an extended fib retracement) and we're now likely to see resistance at $1,575 to $1,577 an ounce. Support was found at the $1,562.5 level on Tuesday night, and this will be a very important level to watch. The last line in the sand is the yearly low of $1,556.4 an ounce. If you have been following our research, you knew that a violation of $1,590.4 an ounce would send this market into a major tailspin — now only a close back above here this week can neutralize the major bear leg created.

Here's the bottom line: If gold trades below $1,563 an ounce on Wednesday, expect a re-test of $1,554. A close below $1,550 would put bears on the attack. Take advantage of the volatility — this is a trader's market.

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