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James Hyerczyk
Comex Gold

Gold is trading lower on Wednesday shortly before the regular session opening as rising U.S. Treasury yields and increasing demand for risky assets continue to weigh on demand for the so-called safe-haven asset. The catalyst behind the moves in the financial markets is optimism that the latest round of trade talks between the United States and China, set to begin in early October, may bring the two economic powerhouses closer to a permanent trade deal.

At 08:12 GMT, December Comex gold futures are trading $1497.80, down $1.40 or -0.09%.

One problem that is being taken care of during the five day sell-off is the excessive bullishness from the gold bugs and their one-sided analysts. When the bullish articles start to fill the internet, the contrarian in me says they all can’t be right.

Their basic argument that gold rallies when interest rates go down is valid, but there has to be a downside to this thinking also. What if rates hold steady or rise? Then gold should go down and that’s what we’re seeing now.

Gold rallied throughout the summer when the RBA cut rates twice and the RBNZ surprised with a 50-basis point rate cut. Since then both central banks have decided to “wait and see.” Furthermore, financial futures traders have pushed ahead their next rate cuts. In other words, the RBNZ is not expected to raise rates on September 24 and may raise again in November. The RBA is no longer expected to raise rates in October and may in November.

Furthermore, the markets have priced in a 25-basis point rate cut by the Fed for weeks and the next one after that is questionable. The ECB is also expected to cut rates this week and implement quantitative easing. Most of this has already been priced into the market.

Remember a few weeks ago when the yield curve inverted? What did gold do? Nothing.

Gold traders were trapped buying strength last week and with their “buy high, sell higher” mentality, they are now trapped holding futures contracts at a six-year high.

The way to trade gold is to be proactive, not reactive. Chasing a market higher on every bit of rate cut news is not the way to trade gold right now. If you have a bullish bias then you should be looking for value. The first short-term value area to consider is $1489.10 to $1471.00. If this fails to hold then gold could break all the way back to its July trading range.

The news driving the market now is an easing of U.S.-China trade relations. As long as conditions continue to improve then gold is likely to remain under pressure with professionals selling rallies rather than buying rallies.

As a trader, you’re going to have to decide whether you’re trading short-term, or long-term. And don’t let a short-term loss turn into a long-term investment.

If you’re long-term then you should be worried. Just take a look at the monthly chart.

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