Gold came under
renewed pressure yesterday as another selloff in equities weighed on precious
metals. Gold has been tightly correlated with the stock market recently, with
the latest losses seemingly driven by investors liquidating positions to cover
losses elsewhere in their portfolios.
Chart: You
can see the correlation between the Nasdaq (blue line) and gold (candlesticks)
To understand the
mechanics, imagine that an investment fund holds stocks, gold and government
bonds. Some stocks suddenly crash, and the fund suffers losses on leveraged
positions. The fund may need to raise cash to meet margin calls, reduce
leverage or satisfy investor redemptions. Rather than selling only the assets
that caused the losses, it may sell whatever it can liquidate quickly. Gold is
particularly useful in this situation because it is highly liquid and can be
sold quickly.
The main drivers
like real yields have been actually pointing to higher gold prices. In fact,
real yields fell significantly as inflation expectations remain roughly
unchanged given the increase in oil prices, while nominal Treasury yields fell as
the losses in the stock market triggered a flight to safety.
We can also see
the unusual divergence between spot gold and the ETFs holdings in the chart below.
Generally speaking, spot prices lead ETFs inflows and outflows, but in this case,
I think it’s technical factors capping the upside in gold, not fundamental
ones.
Once the artificial selling stops weighing on gold, we could see a
strong and quick rebound. We are also approaching a generally favourable seasonal period between December and January. The hard part is timing. Traders could lean on key
technical levels or wait for a fundamental catalyst. Potential catalysts
include a breakthrough in US-Iran negotiations, dovish Fed comments or weaker
US data.
GOLD TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that gold(CFD contract) has extended the
losses and it’s approaching the major support zone around the 3,885 level. If
the price gets there, we can expect the buyers to step in, with a defined risk
below the major upward trendline, to position for a rally into new record
highs. The sellers, on the other hand, will look for a break below the
trendline to increase the bearish bets into the 3,500 level next.
GOLD
TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can
see the price broke below the minor upward trendline yesterday and extended the
drop as the sellers increased the bearish bets into the 3,885 level. If we get a
rebound before the 3,885 level, we can expect the sellers to lean on the
downward trendline, with a defined risk above it, to keep pushing into new
lows. The buyers, on the other hand, will look for a break higher to open the
door for new highs and position for a rally into the 4,400 level next.
GOLD TECHNICAL ANALYSIS – 1
HOUR TIMEFRAME
On the 1 hour chart, we
have a minor downward trendline defining the bearish momentum on this timeframe.
We can expect the sellers to continue to lean on the trendline, with a defined
risk above it, to keep targeting new lows. The buyers, on the other hand, will
look for a break higher to position for a rebound into the major downward
trendline. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Todaywe
conclude the week with the US Employment Cost Index.
This article was written by Giuseppe Dellamotta at investinglive.com.