(Kitco News) Precious metals investors were swept up on Friday as gold and silver fell 4% and nearly 10% respectively.
Hikes in U.S. Treasury and Dollar yields were the main reasons for this massive sell-off, analysts told Kitco News Friday.
Gold experienced a daily loss of $ 80 at one point, with February Comex gold futures last trading at $ 1,836.60, down 4.02%. At the time of writing, the yield on 10-year Treasury bills climbed above 1.1%.
Despite massive daily losses, analysts say the decline may not be over yet.
“At this point, rising government bond yields were largely the cause of a bid for the dollar, which was responsible for the sell-off in gold,” said OANDA senior market analyst Edward Moya. There is too much institutional interest to diversify away from gold. There is a great fear that ETF holdings will fall as President-elect Joe Biden is expected to be more successful in crushing COVID-19. pandemic. Gold is experiencing intense technical sales. “
The gold space would see $ 100 moves in the coming days, added Moya, who told investors to keep an eye on the US dollar.
The dollar bear trade became overcrowded as the dollar’s bearish positioning hit a ten-year high in late 2020, he said.
“There was consensus on Wall Street that the dollar will expand its weakness as the Federal Reserve is the last central bank to raise interest rates. But what happened was the dollar’s bearish trading was overcrowded. We are seeing the dollar again. and some gold bets are unwinding in the process, ”Moya said.
The economic outlook also remains highly uncertain: the US reported a loss of 140,000 jobs in December amid tougher lockdowns and record deaths from the coronavirus.
“There are currently two catalysts that are causing gold to sell out. Rising bond yields and the economy are in danger of getting into trouble. This is causing liquidation and flight to cash,” said Peter Hug, president of Kitco Metals, global trading. “Friday’s employment figures also indicate that the US economy could run into trouble in the first quarter.”
The usual market reaction to bad economic news is a cash move, Hug explained. “Money disappears from gold and ends up in cash, the stock market or the ten-year bond rate,” he said. “There has also been a disappointing vaccine rollout. 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 the yellow metal because of its safe haven are now going to bitcoin.
In comparison, gold lost $ 125 this week, while bitcoin surged more than $ 10,000 and hit a new record of over $ 41,000 on Friday.
“There is a big fundamental shift for a lot of investors,” said Moya. The safe harbor trade of gold has lagged behind the cryptos, especially bitcoin. If you look at the positioning of gold, you see a diversification from gold to cryptos. “
Bitcoin sees new investors in the flight-to-safety argument, Walsh Trading co-director Sean Lusk said. “It hurts the appeal of gold because bitcoin is diminishing attention,” he said.
While the pull of cryptos will weigh on gold in the short term, the bitcoin bubble will eventually burst, Moya said. “Inflation hedging is likely to support much stronger gold prices,” he added.
Many analysts agree with this assessment as they still see gold’s bullish case for this year intact.
“Looking further into the horizon, the Blue Senate should continue to fuel an additional downward trend in the USD, further supporting commodities and precious metals in particular. Reflationary tailwinds and massive money supply growth should continue. should translate into strong price action in the yellow metal, ”TD Securities strategists said.
What happens if the gold price falls below $ 1,800?
The big line in the sand for next week will be the $ 1,770 level – which was the November low, Moya said.
“I would like gold to be around $ 1,850. Everyone will focus on the November lows. We saw prices drop just below $ 1,770. I would be surprised if the $ 1,800 was crossed,” he said. “You will see that prices will eventually stabilize.”
Lusk added that dips to $ 1,850 had been bought in December, which could happen now.
Many of the sales on Friday were technical, he noted. The $ 1,800-20 must hold as it was the mid-December low. A drop to $ 1,800 would be about 5% lower for the year, “Lusk said.
If we close below $ 1,828, gold will drop to $ 1,800, which would open the door to $ 1,778.
Charlie Nedoss, senior market strategist of the LaSalle Futures Group, warned that a move below $ 1,820 would lead to “stops below and $ 1,800 would be next.”
Data to view
Key datasets to keep an eye on next week include US inflation data on Wednesday, unemployment claims on Thursday and PPI, along with retail sales on Friday.
“Retail sales fell sharply in November and another soft result is expected in December, especially given the stay-at-home order in California, the most densely populated state in the US. Google mobility data suggests that people’s traffic in retail and recreational areas has decreased Since there is less movement during the holidays, we suspect that fewer gifts have been bought, ”said James Knightley, chief international economist at ING.
Federal Reserve Chairman Jerome Powell will also speak at the virtual event hosted by Princeton University Bendheim Center for Finance next Thursday.
“Next week we will be talking a lot about the Fed. And now that the 10-year government bond yield is 1.10, this could alarm the Fed. They want the curve to get steeper, but they don’t want it to happen all at once.” The Fed could become more assertive about controlling the yield curve. They have a rising deficit, they must not let interest rates rise too high. It will cause problems, “Moya said.
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