Price of Gold Fundamental Daily Forecast – Rally Stalls as Safe-Haven Buyers Move to Treasury BondsTo put it another way, in less than two days, gold lost 50% of a seven day rally. But the correction was attractive enough to bring the buyers back in. This tells me that investors are now looking for value.
Gold futures are trading nearly flat on Wednesday, but inside yesterday’s range as investors continue to assess the potential damage from the coronavirus outbreak on the global economy. The price action actually suggests investor indecision.
Remember that gold is an investment and not a safe-haven asset as many brokerage firms have led you to believe so it can get overvalued. The true safe-haven is the Treasury market, and that’s where investors have been parking their money for protection.
At 10:25 GMT, April Comex gold is trading $1650.40, up $0.40 or +0.03%.
Many traders are confused about the price action in gold this week in the wake of two huge breaks in the stock market. It seems logical to think that a pair of 1000 point loss days in the Dow should’ve sent gold prices skyrocketing, but that wasn’t been the case. The rally in gold actually stalled the first day, and lost ground on Tuesday.
I have a few ideas as to why the gold rally has stalled in the wake of the stock market weakness. One is value, another is hedge fund influence and a third is competition.
If gold is an investment then it can get priced too high and become unattractive to investors. Gold doesn’t pay a dividend or interest so an investor can only make money when it goes up. He’ll make even more money if he can buy it cheap and sell it when it’s overpriced.
On February 12, April Comex gold hit a low of $1564.40. This led to a seven day rally which took it to $1691.70 on February 24. The half-way point of that price range is $1628.00. On February 25, buyers came in at $1627.00 to stop the price slide. Earlier today, gold hit a high at $1657.10.
To put it another way, in less than two days, gold lost 50% of a seven day rally. But the correction was attractive enough to bring the buyers back in. This tells me that investors are now looking for value. This makes sense since the fundamentals are overwhelmingly bullish. All a good trader has to do is find the value zone and buy.
No oscillators, no indicators, just simple mathematics. Some say, “I couldn’t get it at $1564.40 and I don’t want it at $1691.70 but I’ll settle for the mid-point.” It’s a pattern that repeats in all of the markets.
The hedge funds are active in nearly all of the markets, but like everyone else, they can run out of money to invest, they can be wrong and they can get margin calls that force them to make major decisions like liquidate major positions. This may be another reason why the gold rally stalled.
Stocks were in a major uptrend just two days ago and because momentum was moving higher, there is no doubt the hedge funds were long and leveraged. When the selling started they probably liquidated some positions while hanging on to the rest. Some may have gotten margin calls and in order to meet those calls, they may have pitched their winning gold positions to cover the losses in the stock market. People do it all the time so why not hedge funds.
Lastly, since gold is an investment it competes with other assets for investment dollars. One asset it competes with is Treasury bonds. With momentum driving bonds higher as yields plunge, more money may be flowing into Treasurys than gold.
My advice is to wait for gold to move into a value zone before reentering. Like I said before, the fundamentals are bullish so it may be worthwhile to wait for a favorable price in order to get more bang for your investment dollars.