It has been a month since my last review of the gold market, and it will be useful for us to look at the implementation of my assumptions. Let me remind you that at that time traders were offered an algorithm for working with gold, designed for a period of one to three months. “If there is a trading system signal to buy, buy gold from the 1,850 value zone with a target at 1,900 and fixing losses at the level of 1,930. If the price decreases and there is a trading system signal, we sell #Gold from the 1,930 price zone with a target at 1,775 and an order to fix the loss beyond the level of 1,870”.
Unfortunately, as is often the case with ranged assets, gold’s upside breakthrough did not form and, remained in a short-term downward trend, #Gold price dropped below $1,830, which makes it possible to open short positions. However, let’s not forget that the devil usually sits in the range, offering to play a fool with it, therefore, before opening shorts, let’s look at the fundamental factors that are now acting on gold.
One of the negative factors affecting the price is the growth of Treasury bond yields and the increase in rates by the US Federal Reserve. Speaking at a conference organized by the European Central Bank, Fed Chairman Jerome Powell said that the US central bank can accelerate the rate hike at the next meeting and increase it immediately by 1.000%. This is not a good signal for an asset like gold. In addition, in the six months since the new year, the yield on the 10-year US Treasury bond has doubled and now stands at 3.004% per annum (Fig. 1). This means that from the point of view of long-term investments, gold is not yet in favor, because other assets give even more returns in dollars.
Figure 1: 10-year US Treasury yield
As you know, gold does not bring cash income to investors, therefore, with the growth of yields in the bond market, investors usually choose instruments that allow them to generate cash flow. This is very clearly seen in the investments of American investors, who actively left the gold market in May and June. In the week ending June 24 alone, North American exchange-traded funds lost 16.2 tons of gold due to the withdrawal of money from this segment.
In addition, lower consumer spending in the US and Europe and the need to spend more money on food and fuel are undermining the jewelry industry in these countries, which, although not directly involved in pricing, is a long-term demand factor. The slowdown in economic activity and closure of major cities in China are from the same series of reasons that negatively affect consumer demand.
Another important reason for the negative trends in gold is the growth of the US dollar. Gold, like all other goods, is denominated in US dollars, and the dollar has been growing against a basket of foreign currencies for many months, which puts pressure on the commodity market, and if essential goods can still overcome this trend and are actively growing in price, then in gold’s case, everything is very difficult right now. Moreover, if the dollar index manages to overcome the level of 105.57, then this will mean the possibility of its further growth to the level of 110. Such a breakthrough will lead to a further weakening of the EURUSD rate and will be equivalent to a decrease to parity with the dollar, but for gold, the growth of the dollar will be a big test.
Fig. 2: Technical picture of the US dollar index
But in this scenario, it will be a certain win for investors from the eurozone. A depreciation of the euro, with a stable price of gold in dollars, will increase the price of gold in euros. However, the movement of commodity prices usually outpaces the movement of exchange rates, so if gold prices fall, then investors buying gold in euros are likely to lose more than they gain from the euro’s depreciation against the dollar. Accordingly, with an increase in the price of gold, profit in euros will increase faster than the growth of the exchange rate.
Let’s see how things are in the futures market, which is another element in the pricing of gold contracts. From the point of view of the analysis of the COT report, which traders submit to the US Commodity Futures Commission, speculators are now also in no hurry to invest in gold. Meanwhile, the role of this category of traders is very important for price growth. It is they who provide liquidity and activate demand, wanting to capitalize on price increases, and it is they who have a net positive position, being in fact buyers, taking risks from a decrease in quotes.
However, now the demand for gold in futures contracts is also at its lowest level since August last year, and the long positions of the main buyers indicate that they are not eager to buy gold, which means that we should not expect it to grow yet. By “so far” I mean a one to three month time horizon, and as we all need to understand, these are probabilistic categories.
Thus, the analysis of the fundamental situation confirms the possibility of a short-term sale of gold, which has the ticker #Gold in the terminals of InstaForex.
Fig.3: Gold, weekly timeframe
In addition to the readings of technical indicators, there is one more thing that we should take into account: this is a false breakout of the price up, the so-called “bull trap”, which was formed from June 10 to 13 on the daily time frame, when the price first rose to the level of 1880, and then fell and almost went under the level of 1810. Of course, given that the price could not consolidate lower, the possibility of a return to the range cannot be ruled out.
When opening positions to sell gold, traders can take the support of the weekly timeframe as a guideline for targets, and, as follows from diagram 3, the targets for #Gold decline can be the levels of 1,750 and 1,700 dollars per troy ounce.
Be careful and cautious, follow the rules of money management.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.