February Capacity Utilization Indicating A Drop In Gold Prices

Mar.16.12 | About: SPDR Gold (GLD)

In my previous post about capacity utilization rates (which can be found here), I warned about a peak in capacity utilization. On 16 March 2012, the capacity utilization was released to be 78.7%, down from 78.8%. Although a minor decrease, it is the first time in two years that the capacity utilization dropped (chart 1).

When capacity utilization drops, we can expect cooling inflation rates. This creates an unfavorable environment for precious metals.

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Chart 1: Capacity Utilization Rate U.S.

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While looking at the technicals in gold prices (chart 2), the blue line (60-day moving average) is crossing the green line (200-day moving average). This cross-over of the 60-day moving average over the 200-day moving average is called a dead cross and is bearish for future gold prices.

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Chart 2: Gold Price (blue: 60-day MA, green: 200-day MA)

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Both Marc Faber and Jim Rogers are bearish in the short term about gold prices. Marc Faber said he wouldn't buy gold right away, a 30% correction couldn't be ruled out. Jim Rogers said he would buy gold under $1,600/ounce. So basically, I would wait at least several months before buying into precious metals (NYSEARCA:GLD) (NYSEARCA:SLV) considering a slowdown in capacity utilization rates, bad technicals and bearish outlooks from economic gurus.

Disclosure: I am long GLD, PSLV, AGQ, PHYS, PPLT.