Gold price tumbles $ 100 this week as economic outlook remains bleak, bitcoin competes for safe haven status

(Kitco News) Gold plummeted around 4% on Friday as investors sold the precious metal amid a boom in the U.S. Treasury bond market.

Comex’s gold futures last traded at $ 1,839.40 in February, down 3.88% the day after breaking a significant $ 1,850 an ounce level.

“There are currently two catalysts that are causing gold to sell out. Rise in bond yields and the economy appears to be in trouble. This causes liquidation and flight to cash, ”said Peter Hug, global trading director at Kitco Metals. “The yield on 10-year bonds has risen above 1.1%, which means a significant rise in interest rates. This morning you also had employment data that was much more negative than expected, suggesting that the US economy could run into trouble in the first quarter. “

The usual market response to bad economic news is a cash move, Hug noted. “Commercials run out of gold and come in cash, bet on the stock market or ten-year bond yields,” he said. “There has also been a disappointing roll-out of vaccines. It gets worse before it gets better. “

Hug added that it looks much the same as it did in March, when gold was sold in the first round of COVID-19 lockdowns.

Contributing to the drop in gold was a technical outage, Walsh Trading co-director Sean Lusk told Kitco News. “We still had a lot of longs in the market. Lockdowns are getting tighter. The entire flow goes to the stock market. “

The rise in government bond yields is one of the main culprits behind lower gold prices, Lusk noted. “What’s more, you had a rise in government bond yields, which reduced the appetite for gold, and we had a $ 100 forfeiture this week,” he said.

Higher government bond yields offer a bit of an offer for the US dollar, which is responsible for the sell-off of gold, said OANDA senior market analyst Edward Moya.

“At the moment, the outlook for the dollar is mixed. Dollar bearish trading has become overcrowded. So investors are in the process of settling some gold bets as they anticipate a dollar rebound, ”said Moya.

Another factor is bitcoin competition, analysts said. While gold prices lost $ 100 this week, bitcoin surged more than $ 10,000 and hit a new high of more than $ 41,000 on Friday.

“Bitcoin takes away some of the appeal here. There’s nothing rational behind that, ”Lusk said.

There is a major fundamental shift taking place for many investors, Moya said. “The expectation that gold will be an inflation hedge is lagging behind cryptos, especially bitcoin,” he told Kitco News. “Right now, there is too much institutional interest to diversify away from gold.”

Moya eventually sees bitcoin’s bubble burst and gold soar with the idea that it is a great inflation hedge.

Price levels

Going forward, the big question is whether or not the USD 1,850 level will hold up, the analysts said.

The short-term dips of around $ 1,850 were bought in mid-December, which could also happen here, Lusk noted.

Hug said he was surprised to see gold fall so sharply on Friday. “I thought the USD 1,875 level would hold up. I don’t expect gold to breach $ 1,850 today. And as long as that level continues, the gold market is still on an upward trend. “

If gold falls below USD 1,850, then USD 1,825 is possible, and if it doesn’t, USD 1,800 becomes support, Hug added.

Lusk is looking at whether or not $ 1,828 is holding. “If we hit $ 1,800, we would be about 5% lower than the year before,” he said. “If you’re below $ 1,828, you’ve lost $ 1,800. And $ 1,778 is the next level down. “

Moya added that he will eventually see prices stabilize, but first he would like the USD 1,850 level to remain. “Everyone will be focusing on the November lows when we saw gold drop just below $ 1,770. That will be the line in the sand. I would be surprised if it exceeds $ 1,800, ”he said.