Gold has been hit extra-hard after the intense market sell-offs we saw last week as risk aversion and US dollar strength have reduced demand for the precious metal.
For some time, market participants have considered gold a “safe-haven”, though last week’s selling has shown gold for what it really is: an alternative currency.
Thus it has been trading more like a commodity and its tradtional role as a hedge against inflation is markedly different than a safe haven. With the Euro debt crisis in focus and weighing heavily on the markets, risk aversion has decreased fears of inflation and have in fact stoked fears of deflation as the global economy slows. Recent global grwoth forecasts have been cut by just about everyone.
As a result, we may continue to see more US dollar strength in the near-term, and this would be negative for gold. While gold has bounced this morning off of its daily S2 pivot support at around $1550, its upside potential may be limited to $1700 with possible further downside pressure to resume to $1425 if the Euro debt crisis continues to drag out.
Read more here