Gold Declines, But Support Remains

Source: Eric McWhinnie, Wall St. Cheat Sheet (10/19/11)

"Gold continues to remain volatile, but has rewarded investors that stayed with the safe-haven metal over the past decade."

There was a wave of headlines affecting the markets today. China's (NYSE:FXI) economic expansion slowed to 9.3% in Q311, its slowest pace in two years and below expectations of 9.3%. The dow (NYSE:DIA) opened lower as Goldman Sachs (NYSE:GS) reported its second quarterly loss ever, and IBM (NYSE:IBM) missed revenue estimates for the second time in nine quarters. Keeping with September's trend, gold (NYSE:GLD) traded lower with equities.

On Tuesday morning, gold futures for December delivery fell as low as $1,628.20, representing a nearly $50 decline. As the chart below shows, there was a quick spike down, but gold prices have since recovered to $1,650. Last month, I discussed that investors will be looking for support between $1,575 and $1,625. A pullback to these levels would represent a total retracement from the early August breakout.

Although gold pulled back, investors should feel encouraged that gold held this critical support area. On the other hand, investors need to respect the fact that gold has not traded above its 200-day moving average since late September. Furthermore, the pullback seen today briefly sent gold under its 100-day moving average. Gold continues to remain volatile, but has rewarded investors that stayed with the safe-haven metal over the past decade.

In addition to China, gold investors will need to pay close attention to market developments coming out of Europe. The U.S. dollar (NYSE:UUP) has seen strength recently due to uncertainty surrounding the sovereign debt crisis. As the dollar strengthens, gold tends to dip. In our latest Gold and Silver Premium Newsletter, we warned readers about a coming dip in gold to $1625-$1650. These dips offer better entry points to investors looking to diversify into precious metals (NYSE:DBP). If you would like to receive more professional analysis on equity miners and other precious metal investments, we invite you to try our premium service free for 14 days.

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