Gold is flashing the "death cross" but the bearish chart pattern is not the only thing scaring investors.
The magnetic appeal of a rising stock market has pulled some investment funds away from the yellow metal. Since the beginning of the year, stocks are up nearly 7 percent and gold is down nearly 6 percent.
"What's really behind this is we've had three major risks that supported the gold market last year, which was the fiscal cliff; the possibility of Greece leaving the euro and the euro zone crisis and the third was a hard landing in China, and all of those risks have mitigated this year," said Jim Steel, chief commodities analyst at HSBC. "And I think that has undercut the bullion market. "
Steel said the selling snowballed with the Chinese new year holiday last week. "The whole precious metals complex is under pressure. I think the strength of the equities markets have taken away some of the safe haven and particularly the pull back in the euro has added to this, and we have in the past few days seen pretty substantial hedge fund selling and something of a drop in the exchange traded fund holdings," he said.
But Steel does not believe the 12-year bull market in gold is ending. This pullback is temporary and a reversal in the stock market could easily push gold prices higher. "I think it's dated back to the difficulty the market had getting over $1700," the analyst said.
When the 50-day moving average falls below the 200-day moving average, traders believe it signals a "death cross," a bearish signal. It was very close on Wednesday, and traders say some technical moves become self-fulfilling as investors sell into the momentum.
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But there are plenty of other factors that could bring further declines. "I think you've got a couple of things going on which are kind of surprising. Actually the death cross isn't going to affect gold that much," said RBC analyst George Gero. "What is affecting gold is the expiration Monday of a large put position that a lot of funds initiated at a $1600 strike price, which is now in the money quite a bit."
Gold was down $22 at $1581 per ounce in late morning trading, and was joining other commodities in a sell off. The 200-day moving average on the April contract is at $1664, and the 50-day is at $1668.
Jim Wyckoff, market analyst with JimWyckoff.com, said the put position could be a factor. "The fact that we pushed prices below $1600 and they can exercise those puts, that's one more bearish clue," he said. He described the market as being short-term oversold.
"Gold prices are still in a 12-year old uptrend on the longer-term chart," Wyckoff said. "Right now this pullback is a downside technical correction in a longer-term uptrend. The key on a longer term basis is the $1500 level. If we push multiple closes below $1500, that is going to produce longer term technical damage."
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Selling in the big exchange traded funds has also been a factor, but Gero notes that open interest has actually been increasing in the past two weeks, to about 450,000, from 430,000.
"Companies afraid to miss selling opportunities have increased hedging and trade selling," Gero said. "There's been some selling against the ETF position. Some major managers like Louis Bacon and George Soros have gotten out." Soros Fund Management and Bacon's Moore Capital Management both reported they cut holdings of gold ETFs as of the end of the year. Investor John Paulson's Paulson and Co. reported it retained its 21.8 million shares in SPDR Gold Trust.
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The selling could be close to a bottom. Steel said emerging market buying is already coming in, and as the metal declines, scrap sales will decline, taking pressure off the gold price.
"The more it goes down, the more likely we are to see price sensitive buyers, particularly in the Far East, coming in," he said.