Gold could extend losses on looming 'death cross'

Tue Feb 19, 2013 5:02pm EST

* 50-day moving average nearly falls below its 200 DMA

* Investors not worried about inflation, hurts gold

* Near-term rebound possible as market turns overly bearish

By Frank Tang

NEW YORK, Feb 19 (Reuters) - An ultra-bearish technical formation on gold charts suggests a further pullback could be on the way as a steadier global economic outlook and fading concerns about inflation reduce the investment appeal of bullion.

On Tuesday, spot gold was on the brink of forming a "death cross," when its 50-day moving average broke below its 200-day moving average.

On Tuesday, gold eased 0.3 percent to around $1,604 an ounce. Its 50 DMA was at $1,665.19, hovering about 10 cents above its 200 DMA.

The most recent death cross formed on April 12, 2012, and gold prices dropped $150, or nearly 10 percent, in the following 25 days.

Gold, used by investors as an inflation hedge and a safe haven against economic uncertainty, fell 3.5 percent last week for its biggest weekly drop since May 2012.

Since October, bullion has been steadily falling as investors flock to U.S. equities on signs of a recovering U.S. housing market and a brighter global economic outlook. The S&P 500 rose to a five-year high on Tuesday.

Some investors, however, remain nervous about a sluggish U.S. job recovery despite ongoing economic stimulus by the Federal Reserve.

"The threat of inflation is so far removed from investor concern, while deflation is more of a worry for investors and central banks, and that's what's hurting gold," said Adam Sarhan, chief executive of Sarhan Capital.

Gold's repeated failure to break above its 50 DMA and its multimonth downward trend line also confirmed the bearish case for the metal, Sarhan said.

News that notable institutional investors including Allianz's PIMCO, George Soros and Julian Robertson cut their stake in the world's largest gold exchange-traded fund, SPDR Gold Trust, during the fourth quarter dampened sentiment.

Also, the need for gold as a currency hedge, widely advocated by prominent hedge fund managers such as John Paulson, has significantly lessened as a chaotic break-up of the euro zone appears less likely at least for now, analysts said.

FOOL'S GOLD?

The latest industry data showed that investors have turned more bearish. Managed money's futures and options net length, or their bullish bets, fell to their lowest since December 2008, the CFTC's Commitments of Traders report showed on Friday.

One veteran gold trader said, however, that the growing number of bearish bets suggested gold could rebound in the near term despite the ominous technical indicators.

COMEX gold options floor trader Jonathan Jossen said that one of his clients had sold all of his put options to buy calls last Friday when gold lost more than 2 percent to briefly dip below $1,600 an ounce.

"We've been down too many days in a row not to have a fake out," said Jossen, referring to a market move that tends to catch investors by surprise.

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