Why Today's Gold Price Is Going Down - October 2014

[Note: This story was updated Wednesday, Nov. 5.]

Following my initial post on Halloween last week, gold is still taking it on the chin. It’s on track for a 4.5-year low today.

After peaking at $1,250.25 an ounce on Oct. 21, it has fallen steadily to $1,142. Gold futures were last quoted down $26 at $1,141.70 an ounce.

Three main factors have contributed to why today's gold price is going down.

Here's a look at each one - and why the pain isn't quite over yet...

Why Gold Is Down, Headwind No. 1: Stronger U.S. Dollar

The dollar's been on a tear for months.

A strong U.S. dollar works against gold. That's because gold is priced in dollars - as the dollar gains strength, it takes fewer greenbacks to buy the same ounce of gold. On at least a short-term basis, these two trade inversely.

[Note to Gold Buyers: Gold is still the best safe-haven investment around, but “caveat emptor” – hundreds of counterfeiters are arrested each year for selling fakes. Avoid the scam artists with this buyers’ guide that shows you how to identify the real thing…]

Since July, the U.S. Dollar Index (USD) - a measure of U.S. currency against a weighted basket of its peers - has gained roughly 9%. That's a stunning move for a major currency over a span of just four months. The USD Index just peaked at 87.60 - the highest since 2010.

why today's gold price is going down

Today, the dollar's gaining on news that U.S. midterm elections went to the Republican party. The GOP is widely considered the better choice for economic growth and businesses.

Positive economic reports and the U.S. Federal Reserve's announcement last week that it will end its massive bond-buying program provided support for the dollar's uptick. Optimistic Fed comments on labor and a gain of 3.5% in U.S. GDP for the third quarter boosted the greenback even more. Today, data from ADP Research Institute showed that U.S. companies added 230,000 workers to payrolls in October. That beat the increase of 220,000 economists had predicted.

Also today, we've seen the dollar gather even more strength thanks in part to a weaker yen. The Bank of Japan announced last week that it would increase its planned asset purchases, boosting them to about $716 billion. Today, Bank of Japan Governor Haruhiko Kuroda said he saw no limit to the steps officials can take to defeat deflation. That means more QE from Japan, leading to a weaker currency. The news pushed the greenback up to 114.78 yen - its highest in nearly seven years.

Finally, though less significant than Japan, news from Russia's central bank last week is also hurting gold.  The bank raised its main interest rate from 8% to 9.5% to shore up the falling ruble. The rate's been climbing rapidly since March when it was at 5.5%, and still the ruble keeps hurting. It fell to a record low today, sliding as much as 3.1% against the dollar before trading 2.6% lower by 5:45 p.m. in Moscow.

Gold Price Headwind No. 2: Stronger Stocks

U.S. markets have been in a cyclical bull since 2009. For much of Europe, that's been the case since mid-2011. Japan's been strong since late 2012.

Stocks suck in capital, leaving precious metals behind as they suffer from being viewed as relatively less attractive. The last couple of weeks in particular have shown an almost perfect inverse relationship between the S&P and gold, as reflected in our S&P vs. gold price chart:
why today's gold price is going down chart
The extension of QE by the Bank of Japan last week not only weakens the yen, but it also makes Japanese stocks more attractive. Japan's Nikkei 225 closed at a seven-year high on Tuesday, creating a double whammy for the gold price.

Gold Price Headwind No. 3: Technical Selling

Thrice since last year gold dropped to the $1,180 level. Each time that price acted as support, from which it bounced...until Friday.

This time, the selling pressure took it down to the $1,160 level - and you can bet that technical traders watched closely.

Once previous support is decisively breached, automated selling kicks in as sell stops are triggered. That has likely contributed to further pressure in the gold price.

What's Next for Gold Prices?

On Friday, I told readers that because the $1,180 level had been breached, further downside was likely if that level wasn't regained quickly and decisively. Today's numbers reflect I called it correctly.

Technically, next support is around the $1,150 level - which gold last saw back in early 2010.

If that doesn't hold, then major support exists at the $1,000 level. The $1,000 threshold acted as resistance from early 2008 all the way until mid-2009.
why today's gold price is going down 10 year gold
A full 50% retracement is also not out of the question. Gold's bull-to-date peak was $1,900 in September 2011. A 50% drop (like we saw in the 1970's gold bull market) would see gold bottom in the $970 range.

Keep in mind not to let these short-term moves keep you from owning gold. There's still a very important reason to hold on to the yellow metal - more on that here...

Krauth - a former portfolio adviser and a 20-year veteran of the resource market - explained to Money Morning readers this month how to profit from a stronger U.S. dollar.  This European buy is the perfect way to play the global currency conflict...