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Pro: Fed could send gold down to $650

Talking Numbers

Gold had a terrible day yesterday. And, it’s having a terrible month. Will the September swoon continue?

Gold didn’t just have a terrible day yesterday, it’s also having a terrible month. But that’s nothing compared to what one closely-followed technician believes: He sees gold headed to $650 per ounce. More on that below but first, a little update:

September has been a rough month for bullion. It’s down 5.4% this month, the worst start of a month since June. In contrast, the S&P 500 index is up 3%.

What’s more, the yellow metal dropped 2.6% yesterday – the largest in two months –on two major stories: Syria and jobless claims.

London traders took bullion down from $1,355 per ounce to $1,335 before the New York markets opened. That sell-off happened as the market perceived a lesser probability of a US air strike against Syria.

Then, as the US markets began trading, the previous week’s jobless claims were released showing a 31,000 drop in unemployed to 292,000. Though much of that decline was because of a technical problem in the computer systems for a couple of states, the market took that as a sign that there’s some amount of recovery underway. This brought gold down to nearly $1,325 within an hour.

(Read: US jobless claims fall, but data clouded by processing glitch)

At the moment, positive economic data such as unemployment are perceived to be negative for gold. The market is expecting the Federal Reserve Bank to taper its $85 billion per month bond-buying program known as “quantitative easing” (“QE”). The Fed has been purchasing US Treasury and mortgage bonds to stimulate the economy with lower interest rates and added liquidity in the financial system.

Fed Chairman Ben Bernanke and other monetary policymakers have hinted over the past four months that tapering will be contingent on better economic data. With a diminishing increase of dollars in the system (ie, QE tapering), the perceived need for gold as a safe haven goes down.

“Gold has been a proxy hedge against concern of financial collapse,” says Zachary Karabell, founder and president of River Twice Research. “I don’t know what that costs, I don’t know what it should be valued at, and I’ve never been able to figure that out. So, personally, I have and will always steer clear of this.”

Todd Gordon, founder of TradingAnalysis.com, takes on a bearish view given Fed tapering. According to Gordon, the Fed will not only slow down buying US Treasury bonds, it will also eventually stop and even sell some of its bond inventories. An increase of bonds in the market lowers their prices and raises their yields. That, in turn, will rally the US dollar, thus lowering the prices of assets such as gold.

(Read: Gold hits 4-week low as investors bet on Fed tapering)

“If a $2 trillion-plus Fed balance sheet couldn’t create overheated price levels and $5,000 gold, you can guess what a shrinking Fed balance sheet with increasing interest rates will do it gold,” says Gordon to Talking Numbers.

That leads Gordon to have a long-term view more bearish than most. “We’re looking at $650 an ounce.”

But, Gordon also points out that $1,320 is an extremely significant level for gold which could actually lead to a bull run as shorts start to cover their positions.

To hear more of Karabell on the fundamentals and Gordon on the key technical points with gold, watch the video above.

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