(Kitco News) Investors in precious metals were taken for a ride on Friday, when gold and silver plunged 4% and almost 10%, respectively.
The increases in US Treasury and US dollar yields were the main reasons behind this massive sale, analysts told Kitco News on Friday.
Gold saw a daily loss of $ 80 at one point, with February’s Comex gold futures trading at $ 1,836.60, down 4.02%. At the time of writing, the 10-year Treasury yield rose above 1.1%.
Despite huge daily losses, the bearish movement may not be over yet, according to analysts.
“At this time, for the most part, the increase in Treasury yields has provided an offer for the dollar, responsible for the sale of gold,” said OANDA senior market analyst Edward Moya. “There is a lot of institutional interest in the diversification of gold. There is a great fear that ETF stakes will fall, as President-elect Joe Biden should be more successful in crushing the pandemic COVID-19. Gold is having an intense technical sale. “
The gold space would see movements of $ 100 in the next few days, added Moya, telling investors to pay attention to the US dollar.
The US dollar’s bearish trade has become overcrowded, as the dollar’s bearish position reached the highest level in a decade in late 2020, he said.
“There was a consensus on Wall Street that the dollar will increase its weakness, with the Federal Reserve being the last central bank to raise rates. But what happened was that the dollar’s bearish trade was overcrowded. We are seeing the dollar recovering. , and some bets on gold are playing out in the process, “said Moya.
The economic outlook also remains very uncertain, with the US reporting a loss of 140,000 jobs in December amid stricter blocks and a record number of coronavirus deaths.
“There are two catalysts now that are causing gold to be sold. The increase in bond yields and the economy looking like it’s in trouble. This is causing the liquidation and the flight to money,” said Peter Hug, director of global trade at Kitco Metals. “Friday’s employment data also indicates that the US economy may be in trouble in the first quarter.”
The market’s usual reaction to bad economic news is a shift to money, Hug said. “Money is pouring out of gold and into cash, the stock market or 10-year bond yields,” he said. “There was also a disappointing vaccine launch. It will get worse before it gets better.”
Crypto Competition
More and more analysts agree that bitcoin is stealing gold’s attention, and the regular inflows that would have gone to yellow metal because of its safe haven attraction are now going to bitcoin.
For comparison, gold lost $ 125 this week, while bitcoin rose more than $ 10,000, reaching a new record of more than $ 41,000 on Friday.
“There is a major fundamental shift for many investors,” said Moya. Safe-haven gold trade was second to cryptocurrencies, especially bitcoin. When you look at the positioning of gold, you see a diversification coming out of gold for crypts. “
Bitcoin is seeing new investors in the security-flight argument, said Walsh Trading co-director Sean Lusk. “It undermines gold’s appeal with bitcoin taking away attention,” he said.
However, while crypto fascination weighs on gold in the short term, the bitcoin bubble will eventually burst, Moya said. “The inflation hedge is expected to support much stronger gold prices,” he added.
Many analysts agree with this assessment, as they see the gold bullish scenario for this year still intact.
“Looking further on the horizon, the Blue Senate should continue to fuel an additional fall in the dollar, further supporting commodities and particularly precious metals. Winds in favor of inflation and the massive growth of the money supply are yet to translate into strong yellow metal price action, “strategists said.
What happens when the price of gold drops below $ 1,800?
The big bet on the sand for next week will be the $ 1,770 level – which was the low of November, said Moya.
“I would like to see gold hold at around $ 1,850. Everyone will focus on November lows. We have seen prices drop just below $ 1,770. I would be surprised to see $ 1,800 breached,” he said. “You will see that prices will eventually stabilize.”
Lusk added that the drops to $ 1,850 were bought in December, which could also happen now.
Many of the sales on Friday were technical, he noted. The $ 1,800-20 has to remain, as it was the mid-December low. A drop to $ 1,800 would represent a drop of about 5% in the year, “said Lusk.
If we close below $ 1,828, gold will fall to $ 1,800, which would open the door to $ 1,778.
LaSalle Futures Group senior market strategist Charlie Nedoss has warned that a move below $ 1,820 would trigger “stops that are below and $ 1,800 will be next”.
Data to watch
The main data sets to look at next week include US inflation figures on Wednesday, unemployment claims on Thursday and the PPI, along with retail sales on Friday.
“Retail sales fell sharply in November, and another weak result is expected in December, especially due to the order to stay in California, the most populous state in the United States. Google’s mobility data suggests that people traffic in the areas retail and recreational is moderating, and less movement during the holiday season, we suspect there was less purchase of gifts as well, “said ING chief international economist James Knightley.
Federal Reserve Chairman Jerome Powell is also due to speak next week on Thursday at the virtual event hosted by the Princeton University Bendheim Center for Finance.
“Next week, we will have a lot of conversations with the Fed. And now that 10-year Treasury yields are at 1.10, that may alarm the Fed. They want the curve to tip, but they don’t want it to happen in a The Fed can become more vocal when it comes to controlling the interest curve. They have a growing deficit, they can’t have rates going up too much. That will pose problems, “said Moya.
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