NEW YORK (TheStreet) -- When the Federal Reserve unleashed its first round of quantitative easing in 2008, gold soared 34%. The European Central Bank just announced its intentions to devalue the euro via its own version of quantitative easing. So why is gold selling off in the face of massive European QE?
Here are three charts that explain it.
Chart No. 1: QE Not Always Bullish for Gold
The first chart shows how the Federal Reserve's QE affected gold. We are using the SPDR Gold Shares ETF (GLD) as proxy for gold prices.
- During QE1, the gold prices represented by GLD soared 34%.
- During QE2, gold gained 10%.
- During QE3 and QE4, gold prices actually fell 32%.
Conclusion: QE is not always bullish for gold.
Chart No. 2: Gold Sentiment
Back in November 2014, investors were ready to give up all hope on gold. Below are some headlines from early November:
- "A final purge to $700? What gold bulls' surrender might look like" (Yahoo! Finance)
- "Here's why gold could be headed to $800" (CNBC)
- "Gold bulls beware: More pain coming before the metal will find a bottom" (Yahoo! Finance)
Such extreme pessimism is often reached after sellers have been flushed out. With most sellers gone, buyers gain the upper hand and prices rise.
That's exactly what happened. Gold prices bottomed at $1,140 per ounce on November 7, and have rallied as high as $1,308 since then.
In January, the pendulum swung from extreme pessimism to optimism and buyers dried up.
Commercial traders started selling gold at an extreme degree. Commercial traders are gold miners and insiders, considered the "smart money" in this market.
Per the chart below, commercial traders scaled down their long positions. When that has happened (October 2013, March 2014 and July 2014), gold has faltered.
Chart No. 3: Gold Seasonality
Seasonal patterns emerge after analyzing many decades of daily closing prices. The gold seasonality chart below is based on 35 years worth of data and shows how an 'average year' looks like based on past performance patterns.
The chart below plots gold seasonality against the actual price of the SPDR Gold Shares, showing a top around January 22.
Based on seasonality, gold may continue to trade lower. A full-year gold seasonality chart is available here: Gold Seasonality Chart
Should You Own Gold Right Now?
The November 2014 low had all the ingredients for a more permanent bottom. However, commercial traders don't want to own gold right now, and seasonality allows for further losses. Based on technical analysis, only a close below $1,200 will unlock further down side. The corresponding number for the SPDR Gold ETF is 114.50.