Gold slumps despite elevated risks

Trade war concerns? Check. Currency crisis in Turkey? Check. Raised stock market volatility? Check. Gold still going down? Check. Gold just can’t get a break.

Despite everything that’s happening – from trade wars to currency crises – the so-called “safe haven” yellow precious metal is finding no love whatsoever. Indeed, this morning saw gold fall below the technically-important $1,200 per oz. level after its recent consolidation, which probably triggered a cluster of sell stop orders and accelerated the decline. Market participants have favored the likes of the Swiss franc and Japanese yen as their go-to safe haven plays rather than gold and silver. This may be because of the fact the metals pay no interest and cost money to store, especially now at a time when some central banks are turning hawkish and bond yields are on the rise. What’s more, the U.S. dollar has been going up which makes buck-denominated precious metals even less appealing. 

But it is not just the XAU/USD which has been falling. Today saw the euro-, pound- and franc-denominated gold prices fall across the board. Thanks to its decline, speculative investors are certainly not feeling optimistic about gold. In the week to August 7, they increased their net short positions sharply to 66,100 contracts. The short bets are likely to have increased further given the breakdown of the $1200 support level. The only hope we see for gold in the near term is if these speculators now take profit on their short positions. Also, should the stock market sell-off get too severe then surely at some point investors may have to ignore the impact of the dollar and re-consider gold for its traditional role as a safe haven asset. But we think that the best chance for a comeback is if the dollar were to fall again.

At the time of writing gold was looking rather heavy having just broken the $1200 support level. As price tests liquidity below here, let’s see what happens on a daily closing basis. In the event of a clean break down, it will become likely that gold may go on to drop to the next support at $1,190 initially ahead of $1,145/46 area next – the latter being last year’s low.

Meanwhile if gold goes back above $1,200 then we would consider bullish setups again, especially if the most recent high at $1215/17 area is reclaimed. If that were to happen then today’s breakdown would be considered a false move – and thus a reversal. We are also keeping an eye on gold’s current position from the 200-day average. Although at the moment the growing gap tells us that the trend is clearly bearish, it is common for price to usually come back and close the gap over time. With gold being about $100 or 7.8% below its 200-day average right now, we think that the risk of mean reversion is high. So we are actually on the lookout for bullish signs to emerge soon. But for the time being and given the latest breakdown, the bears remain firmly in control and we may see further weakness first.