Gold drops as stocks selling pause for breath

Markets are a little calmer today, with stocks on the rebound and safe haven assets retreating. Gold, which failed find any meaningful support from the escalation in US-China trade spat, was lower again. Unless it stages a surprise rally in these last two days of May, it will close lower for the fourth consecutive month. Meanwhile in FX, both the USD/JPY and USD/CHF – pairs sensitive to risk appetite – were on the rise. In fact, this marks the fourth consecutive day that the USD/CHF is climbing (and the third that gold is declining), further boosting our suspicion about the markets being in a full-blown risk-off mode. Gold’s inability to rise meaningfully in recent weeks goes to show how bearish sentiment is towards the metal right now. Despite raised geopolitical risks concerning the US, China and Iran, and not to mention the slump in bond yields, the bulls were nowhere to be seen. Investors are concerned that physical demand for gold and base metals from China and other emerging market (EM) economies would be hit because of recent falls in EM currencies. However, that being said, the markets remain on the edge and any further escalation in the trade wars could see the return of risk aversion quickly. For now at least, the markets are having a breather.

Investors eye US GDP

The US dollar – and by extension, gold – could move sharply in one or the other direction later should the US growth figure deviates from expectations by a meaningful margin. After the initial estimate of 3.2%, analysts expect first quarter GDP to have been revised slightly lower to 3.1% on an annualised format (that is, quarterly change x4). If it turns out that the world’s largest economy performed better than that then the dollar could extend its gains further, undermining gold. Conversely, a poor showing could derail the buck rally and underpin gold – although for a full-on reversal it would probably require a very poor GDP print.

Could gold drop to a new 2019 low?

If the metal does go lower, as we think it might, then the first objective would be the liquidity below this year’s earlier low at $1266. Below that we have a couple of retracement levels to watch, with the mid-point of the range from the August low coming in at $1253/4. Meanwhile short-term resistances to watch include $1280, $1285 and $1293, levels which were previously support. We would only turn bullish again on gold should it rise back above that $1300 hurdle and stay above it, or print a bullish reversal at lower levels first.

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Source: TradingView and FOREX.com.