Gold heading for a fall?

These signs could be a nice contra indicator. Wisdom says: 'If everyone is bullish and have bought, where are other buyers to push prices higher?' In other words, if the 'whole world' is positive, a fall is due. However, as we know, trends tend to last longer than expected and are slowly changing.

Looking at gold, I don't see too many factors which could push it further through the roof. Sure, lower (US) interest rates are a positive factor for gold, as well as the safe haven function of the yellow precious metal. On the other hand, the Federal Reserve moved the federal funds rate from 5.25 per cent towards three pre cent and the end is not in sight yet.

Its Chariman Ben Bernanke is determined to avoid a recession in the US. Yet, the dollar strengthened the last couple of weeks from $1.49 to $1.46. In other words, the selling pressure in the dollar has diminished. If the euro breaks $1.44 we could expect the currency to make a significant move towards $1.20. If we look at the US dollar index, 75 is a nice and good support for now. The dollar tries to break out and if the currency manages to gain momentum, the next target might be 80 or even higher.

Stock market turmoil

Another important factor for investors to keep in mind is that as long as the turmoil in the stock markets continue, this could have a negative impact on commodities. Investors might also withdraw money out of speculative investments like gold (if the world faces a recession), oil and other (precious) metals.

This week, Warren Buffett offered some 'help' to provide insurance on municipal bonds guaranteed by companies such as MBIA. This buoyed investor's confidence and consequently diminished the metal's appeal as a safe haven. If Buffett's plan calms down the financial markets, this could contribute further to gold weakness.

Gold came under pressure and dropped as imports of the metal in India, the world's biggest gold buyer, slumped for a fourth consecutive month in January. An analyst at HSBC noticed that `a virtual collapse' of Indian gold imports and `a weak demand in other emerging markets could be 'a powerful drag' on gold prices.

Watching the chart, I agree with HSBC's opinion - there are too few factors that will push gold prices higher. In other words, in my opinion there is too much downside risk. It might be wise to take some chips off the table. A drop from a current level of $905 towards $800 or lower would not surprise me at all.

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