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James Hyerczyk

Gold futures settled lower in a volatile trade last week. The market started out higher on concerns over the economic impact of the coronavirus outbreak, but then collapsed its lowest level since January 14. However, once the selling pressure subsided, the market was able to claw back more than 50% of its earlier losses.

Last week, April Comex gold settled at $1573.40, down $14:50 or -0.91%.

I don’t like to use the phrase “safe-haven buying” because I consider gold more of an investment than a safe-haven asset like Treasury bonds or the Japanese Yen. I also see gold as more of a hedge against a steep decline in the stock market. In my book, investors are either chasing risk or shunning risk.

At this time, Treasurys are the more favorable safe-haven because they pay interest. The Japanese Yen is more of a necessity because of the carry trade. Investors who take low interest loans from Japanese banks have to pay those loans off so they buy Yen to make their payments. Gold appears to be asset of last resort.

We’re speaking short-term of course. Longer-term gold is attractive because interest rates are low and may even move lower. Since it is an investment, investors want to see value so the best buys tend to be after sharp breaks. It’s hard to make money buying strength all the time. We’ve seen a little “sell the rally, buy the dip” price action this year.

Gold put in its top last week when China pumped up its stock market with massive amounts of liquidity. The move spread to the global equity markets and the gold rally was history. Gold started to pick up a bid late in the week after a steep correction as investors took hedge positions against a stock market sell-off.

Last week, chasing the market higher didn’t pay off, but buying the dip did. As long as China’s economy remains an issue and U.S. stocks are hanging on by a thread just under all-time highs, I suspect we’re going to see this type of price action until the global stock markets resume their uptrends in a convincing manner, or the rally comes to an end and there is a steep sell-off. I’m looking for more of a “push me, pull you” price action.

Those gold traders betting on a steep break are going to continue to support gold, but gains are likely to be limited if the U.S. Dollar continues to soar. Furthermore, gold will also continue to be underpinned by the threat of lower interest rates.

So in conclusion, I’m not really bearish on gold, per se, but I wouldn’t be surprised by a pullback into value areas like $1539.10 to $1520.00. I expect some major buying to come in on a test of this area, but if fails then we’re going to have to reset our bullish outlook.

The setup is there for a rally, but it’s not going to be a headline about the virus that brings in the big boy buyers, it’s going to be a major break in the global equity markets.

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