The spot price of gold at Tuesday’s low was down a remarkable $100 an ounce from the highs of a week ago. But charts show that there have been these kinds of losses in a single day before.
In fact, exactly two weeks ago, spot gold, which reflects real-time trades in bullion, was down almost $210 from the all-time highs hit three days earlier.
Tuesday’s $1,914.42 low on bullion also brought spot gold precariously close to Friday’s trough of $1,911.65. If that support breaks, then a plunge to $1,800 territory would be the next course, possibly a test of $1,864.30. But again, that’s a trough hit on Aug. 12, only two weeks ago. So, spot gold’s been there before.
At Tuesday’s settlement, the benchmark December gold futures contract on COMEX closed down for a fourth time in five days. But just two months ago—between June 12 and 18, in a similar five-day stretch—the same thing happened. So, again, this four-day downturn is nothing unusual in the recent history of gold.
Recent Headlines Surprised Gold Bulls
As the yellow metal struggled to pin down the losses of the past week—forced by the potent combination of higher bond yields, resurgent equities and a strong dollar—many gold bulls were startled by the headwinds.
This is because just about a week ago, gold seemed to be on the course to resuming its record-making ways, after bullion’s flight to $2,015.45 and December gold’s race to $2,024.60, both on Aug 18. But like any bull trap, the downward pressure on gold after a nine-week glittering run wasn’t over and caught those who went long.
The trigger for the selloff of the past week: the Fed's minutes for its July meeting. Released last Wednesday, they showed the central bank not keen on yield curve controls. Benchmark yield from the U.S. Treasury’s 10-year note had been negative for most of the past two months and forex traders had been hoping the Fed would keep it that way by subjecting controls on the instrument. When the Fed minutes showed that to be an empty hope, traders reacted by boosting the dollar and booting gold.
Powell Speech Could Be Game-Changer Though
Yet, the next 24 hours could be a game-changer for gold with Federal Reserve Chairman Jay Powell due to present his outlook on the U.S. economy at the central bank’s annual Monetary Policy Framework Review.
Powell—who will be speaking from home due to the coronavirus pandemic, instead of the typical Jackson Hole, Wyoming venue for the speech—is expected to make the case for stronger monetary stimulus to help the economy.
Investors will be on the lookout for signs that the Fed will find additional ways to bolster the economy should Congress fail to deliver on a new pandemic relief package.
A major question, particularly ahead of the Fed's September policy meeting, is whether Powell will favor shifting inflation targets to an average, instead of the long-favored 2% level.
Such a shift will allow inflation to run higher before interest rates are raised, a dynamic that could clearly weaken the dollar and boost gold.
“If Powell confirms the bank will be moving to some form of average inflation targeting regime, it would prove risk positive and dollar negative,” Eamonn Sheridan said, posting on ForexLive.
Ed Moya, analyst at OANDA in New York, agreed.
“Gold investors seem undeterred with the recent spat of weakness,” he said. “This puts all eyes on Fed Chair Powell’s Jackson Hole speech on Thursday.”
TD Securities said as much but in more elaborate language.
“The average inflation targeting framework represents a massive shift in the macroeconomic template that should continue to support inflation-hedge assets."
“As financial repression continues to suppress real rates, we expect that capital will seek shelter in precious metals — which suggests further weakness in the complex represents a buying opportunity."
Trend Followers In Gold Well Positioned
TD Securities added that trend followers remain well-positioned to profit from further increases in the complex.
“We don't anticipate any liquidations as the required threshold remains large considering given extreme upside momentum.”
Still, Moya cautioned that the downdraft in gold over the past week, which was heightened by a blood plasma therapy option for the coronavirus and the easing of U.S.-China tensions, also showed high potential for volatility ahead.
“The risks to the global economic outlook and election uncertainty should see gold bulls defend the $1,900 level,” he said.
“Until the stimulus trade is affirmed by governments and central banks, gold could remain in limbo for a while.”
Another unknown before Powell’s speech will be what the U.S. Labor Department has to say in its weekly jobless claims report due at 8:30 AM ET (12:30 GMT) on Thursday, just ahead of the Fed chairman’s address. In the previous week to August 15, jobless claims came in 1.1 million, higher than the forecast 925,000.
In Wednesday’s Asian trade, spot gold was marginally higher at under $1,930, while December gold showed a 0.6% gain at just below $1,934.
Beware Of Volatility Though
Could gold slip again before Powell’s speech? If so, how low could it go?
Greg Michalowski at ForexLive said in a Tuesday post that bullion needs to move back above $1939 to tilt the bias toward gold moving higher.
“On the downside the next target … comes in around the $1903 level,” Michalowski said. “A move below would open the door for a retest of the August 12 low at $1,863.15.”
That aligns with the call made by Sunil Kumar Dixit, an independent precious metals analyst, who says spot gold must defend $1,900 to prevent further erosion. “A break below this points to a potential test of $1,864.”
On the upper side, if spot gold got beyond $1,955, then it could steam on toward $1,990, and test $2,008 and beyond, Dixit said.
We’ll have to wait to hear from Powell before we can determine the yellow metal's next move.
Disclaimer: Barani Krishnan does not hold a position in the commodities or securities he writes about.