- Gold prices trying to find a bottom following a switch in safe-haven flows.
- US dollar and bond market is in a bubble, bulls waiting for the pop.
Gold is looking for a bottom having dropped significantly this month from a high of $1,703 to a low of $1,451.08, trading today between a corrective range of $1,464.37 and $1,501.20/oz. The downside is counter-intuitive to what would normally mean a bid for gold, as US stock markets plummet.
In an environment that would usually attract a safe-haven bid for the precious metals market, even as the great Coronavirus Crash has been frightening in its speed and breadth, gold has crashed. The deleveraging and crisis flows have meant that investors have needed to cash in on their 2019 winners, such as gold, and a move into cash has exacerbated the downside in the precious metals market, similar to what happened in 2008.
US dollar climbs in a bid for USD liquidity
However, while the US dollar climbs in a bid for USD liquidity, whereby the cost of getting dollars through swap contracts soared despite the best efforts of the Federal Reserve and other central banks, gold prices could be back on the rise again as the cat gets let out the bag when considering the US bond market bubble. Long-term US yields have spiked as investors sold their positions amid discussions about a potential $1 trillion federal stimulus to support the economy and that should be a canary in the mine for investors.
We are entering what would usually equate to a deflationary market for the US dollar, whereby the Federal Reserve has cut its benchmark federal funds rate by 1.5 percentage points, to just above zero, in two emergency meetings. The Fed has also pledged to buy $700 billion in Treasuries and mortgage-backed securities. The Fed is now also lending money to big companies that have lost access to private financing, by buying commercial paper directly from issuers. And now, the US president, Donald Trump and his administration have been discussing a plan that could amount to as much as $1.3 trillion in spending. the plan will be including direct payments of $500 billion, or more than $1,000 per person – helicopter money. Then, what currency can rise whereby the Treasury Secretary Steven Mnuchin tells the Republican senators that in the absence of government action, in a worst-case scenario, the unemployment rate could rise to 20%?
Can't call the bottom until the dollar demand shifts
The price of gold will likely find a bottom, but the situation is fluid and timing is anyone's guess. US stocks could have a lot further to fall in a worst-case scenario, targetting the 2008 lows. In such a scenario, as investors continue to cash out of long holdings to cover margin calls, gold could fall further from here, until the dollar flips over and gold attracts a safe haven bid again. "Further, CTA selling pressure is adding weight on prices as the trend followers are set to target a net short position in gold for the first time in nearly a year," analysts at TD Securities argued.
Gold levels
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
GBP/USD rises to near 1.2540, driven by higher UK GDP
GBP/USD edged higher to near 1.2540 during Asian hours on Friday, buoyed by the release of higher-than-expected UK Gross Domestic Product (GDP) data for the first quarter.
EUR/USD: The crucial resistance level will emerge at the 1.0790–1.0800 region
The EUR/USD pair trades on a softer note near 1.0775 during the early European hours on Friday. The downtick of the major pair is supported by the renewed US Dollar demand amid hawkish comments from Federal Reserve officials.
Gold price attracts some buyers despite hawkish Fedspeak
Gold price edges higher for the second consecutive day on Friday. Weak employment data bolstered the speculation that the weakening economy would force the Fed to cut rates.
XRP tests support at $0.50 as Ripple joins alliance to work on blockchain recovery
XRP trades around $0.5174 early on Friday, wiping out gains from earlier in the week, as Ripple announced it has joined an alliance to support digital asset recovery alongside Hedera and the Algorand Foundation.
Rate cut optimism fuelled by higher US jobless claims
With Federal Reserve policy acting as the primary driver of investor sentiment in 2024, renewed optimism surrounding the possibility of rate cuts has propelled the Dow to its most significant rally since December.