LONDON (Reuters) - Gold’s slide to eight-month lows over the last week has brought it within sight of a cluster of chart support lines near its 2013 lows, a breach of which could set up a slide back to $1,000 an ounce.
Analysts who study past price patterns for clues on the next direction of trade say a breach of support around the metal’s June 2013 low of $1,180 an ounce could see it fall back towards triple figures as soon as early next year.
Around the June low, lines of support run all the way down to $1,150, the 61.8 percent Fibonacci retracement of gold’s rally from its 2008 lows to its 2011 record high at $1,920.30.
“The pressure has been to the downside for over two years now,” said Nicole Elliott, technical analyst at ForexTrading.Tv.
“If you’re sitting in a gold fund, or a perma bull, you just can’t sit there... You have to say, enough’s enough.”
Gold prices have tumbled to their lowest since Jan. 9 over the last week, bottoming out at $1,225.30 an ounce.
Since rebounding from its 2013 lows, gold has made a series of descending highs in what technical analysts say is a typically bearish pattern. Its recent break out of the triangle pattern it has been forming since the middle of last year suggests that further weakness is on the way, they add.
If it were to drop through the band of support lines lying between $1,200 and $1,150, it risks posting the steepest drop since the second quarter of 2013, when the metal plunged $200 an ounce in just two days after breaking long-term support at $1,525.
“It does have a huge event risk,” Gerry Celaya, chairman of Redtower Asset Management, said. “You could see $1,180 go, and the next thing you know, you’re below $1,100 within a day or so. That would be similar to what we saw back in 2013 - everyone saw us in a range above $1,500, then suddenly we weren’t.”
For now, gold is pulling back some of the last week’s lost ground, heading back towards the $1,240 an ounce area. This is likely to be temporary, however.
“Short term, over the next few days we’ll see a little bounce, then we’ll move back down again,” Commerzbank analyst Axel Rudolph said. “Probably before the end of the year we’ll head to the $1,190-1,180 area... then we’re probably going to bounce out.”
“Depending how long the bounce takes, we can forecast when we will reach (the next target),” he added. “Perhaps by the end of the first quarter of 2015, we’ll reach the $1,000 level.”
If gold does head back towards that point, a low not seen in five years, it would test the mettle of gold bulls who had been hoping that the current year’s price stagnation had been setting the metal up for a rebound.
Investors who bought after the early stages of the financial crisis could see their investments slip slowly under water. But if they choose to sell now, they will lose out on any potential rebound.
Rudolph believes that from a chart perspective, gold will recover its poise after testing $1,000. But for many gold investors, such a retreat could spark another loss of confidence after last year’s 28 percent plunge.
Holdings of gold-backed exchange-traded funds, popular investment vehicles that issue securities backed by physical bullion, are 284 tonnes higher than they were when gold rose above $1,000 an ounce. Any positions added above that level would be unprofitable once prices drop below that point.
Technical analysts predict a test of $1,180 an ounce in the next few months, with a return of the $1,000 level by early next year then potentially on the cards. As seen last year, price moves following a breach of key chart support can be swift.
“When do see a break below $1,180, we could see a move towards $1,000 an ounce probably within four weeks,” Celaya said.
“When you break out of a pattern like this, usually the pick-up in momentum should be swift. They’ll be clearing out the cupboards, so to speak.”
Reporting by Jan Harvey; Editing by Veronica Brown and Hugh Lawson