Gold’s $210 drop from its record high to its low last week came as bond yields surged from their historically low levels, slightly eroding the appeal of the noninterest-bearing precious metals. The sell-off was made worse because of technical selling as stop loss orders of leveraged longs were tripped, causing a snowball effect. Gold and silver stabilised by Wednesday but still closed well lower for the week. At the start of this week, the metals were both higher when this report was written.
The important question is of course what will happen next, not what happened last week. Before I discuss a couple of fundamental considerations, it is worth pointing out some technical factors which suggests the rally may not have ended yet. Have a look at the daily chart of gold:
Source: : TradingView.com and ThinkMarkets
Following last week’s sell-off, gold has held its bullish trend line, as well as reclaiming the 21-day exponential moving average. What’s more, there has been no downside follow-through when the metal broke Friday’s low at $132ish earlier, suggesting that the sellers looking to take advantage of potential downside momentum may have been trapped. If this view is correct, then gold will most likely probe liquidity above Friday’s high next around $1962, where trapped traders’ stop loss orders will undoubtedly be resting. And if gold goes go above $1962 and hold above it, then a revisit of the $2K handle will be the next target for the bulls. It will effectively be game over for the sellers should gold then go on to break above last Tuesday’s big red candle at $2030.
BUT, if gold turns red again and prints a fresh daily low then all bullish bets are off, as this would invalidate the idea that the sellers are the trapped group of market participants. In this potential scenario, a revisit of the bullish trend line would not come as major surprise.
Fundamentals still supportive
I think the fundamentals still remain supportive for gold, even if yields did rebound last week and there is growing optimism surrounding a vaccine for Covid-19.
While the race to develop an effective and safe vaccine against Covid-19 continues, the World Health Organization has yet to approve any of them. Questions were immediately raised about the safety and efficacy of the Russian vaccine, which was granted regulatory approval by Russia last week, despite less than two months of human testing. Worldwide, about 7 vaccine candidates are thought to be in the Phase 3 large-scale efficacy trials, the last stage before they are approved. So, hopefully, an effective vaccine should soon become available in any case.
But would that necessarily reduce the appeal of gold? It is worth remembering that the precious metal has been trending positively with the S&P 500 for a few years now, suggesting investors are treating gold more like a risk than haven asset, thanks mainly to central bank largess. Thus, if the potential approval of a Covid-19 vaccine causes risk assets to rise further, this may not necessarily mark the end of the bullish trend for gold. If anything, it could actually boost expectations over jewellery demand.
Meanwhile, central banks will be in no rush to tighten monetary policy, despite the potential approval of Covid-19 vaccines. Central Banks’ policy stances will remain extremely loose until such a time they are convinced that the global recovery is on a strong footing and inflation is on the ascendency. This could possibly take a year or even longer. So, I reckon yields will not be going up sharply any time soon, as central banks will keep bidding up bond prices. All else being equal, this should keep gold prices supported.
So, while it is possible gold could ease further lower in the short-term, I think the downside will be limited. In fact, judging by price action over the past few trading days, gold may have already hit a low.