Gold & Silver Testing Critical Technical Support Levels

Gold and silver are testing key technical support levels this week. Some analysts have already flipped their outlook to bearish over the past few days, but I believe the uptrend remains intact as long as current support levels are not breached.

Goldman Sachs has predicted new lows for gold in 2014, but physical buying remains strong and precious metals represent a good safe haven during increasing political tensions worldwide. I also believe that precious metals are one of the only asset classes that remain undervalued at current levels. Stocks, real estate and just about everything else has climbed to unreasonable valuations by any number of measurements.

During late January, gold broke through resistance at the downward sloping trend line that had been in place for over year. This key breakout is circled in the chart below. A new uptrend support line was established starting in December and gold is now testing this support line at $1,300, also the 200-day moving average, for the second time.

Gold’s rally hasn’t convinced Goldman SachsGS -0.93% to change its bearish thinking on the precious metal.

Gold has been one of the top performers across asset classes this year, up 11%, but Goldman says unsustainable catalysts have driven the rally. The firm doesn’t believe the recent gains are sustainable.

Three factors — weather-impacted U.S. economic activity, Chinese credit concerns and Ukraine tensions–have played a role in pushing gold prices higher in 2014. But Goldman sees these factors diminishing in the near future, which will prompt gold to tumble off current levels.

Goldman reiterated its $1,050 year-end price target for gold, which is about 22% below current levels.

“While further escalation in tensions could support gold prices, we expect a sequential acceleration in both U.S. and Chinese activity, and hence for gold prices to decline, although it may take several weeks to lift uncertainty around this acceleration,” Damien Courvalin, an analyst at Goldman, wrote to clients. “Importantly, it would require a significant sustained slowdown in US growth for us to revisit our expectation for lower US gold prices over the next two years.”

Gold futures recently rose 0.5% to $1336.80 an ounce. The precious metal had dropped over the past four sessions, falling 3.5% throughout the skid. Gold is up 0.7% this month.

Gold’s rally this year has been driven by investor concerns that a flagging U.S. recovery may slow the pace at which the Federal Reserve rolls back its stimulus program. On Wednesday, the Fed dialed back its bond-buying program by $10 billion to $55 billion a month. In a press conference after the meeting, Ms. Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends—a conclusion that could come this fall.

Goldman says a re-acceleration in U.S. activity as the weather improves will ultimately push gold prices lower. From Goldman:

“While we see clear catalysts for the recent rally in gold prices, this move has been large relative to US real rates which are a key input into our forecasts and benchmarking of gold prices. As a result, we see potential for a meaningful decline in gold prices towards the level implied by 10-year TIPS yields, which our rates strategists expect to rise further this year, and reiterate our year-end $1,050/toz gold price forecast. More broadly, we believe that with tapering of the Fed’s QE, US economic releases are back to being a key driving force behind gold prices. As a result, we expect that the decline in gold prices will likely be data dependent, in contrast to our 2013 bearish gold view which was driven by the disconnect between stretched long gold speculative positioning and stabilizing US growth.”

Gold is often used as a hedge against economic uncertainty and weakness in the dollar, which has been hurt by the Fed’s bond buying policy.

Despite the 2014 rally, gold has a long way to go from recapturing recent losses incurred in recent years. Gold dropped 28% in 2013, its first drop in 13 years. The yellow metal remains down about 29% from its record settle high of $1,888.70 reached in August 2011.

“Admittedly, a rebound in U.S. and Chinese growth this spring is a consensus view and a disappointment in either would lead us to delay our expected decline in gold prices,” Goldman says. “However, it would require a significant sustained slowdown in US growth for us to revisit our expectation for lower U.S. gold prices over the next two years.”

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