Technical Analysis

Gold Extends Drop ahead of US CPI, FOMC

Typography

Thanks to the ongoing rally on Wall Street and the dollar's recent comeback, not to mention the ongoing craze in the cryptos, gold continues to remain largely out of favour. At $1236 per troy ounce, the yellow metal finds itself at its lowest level since mid-July. So far there are no clear signs to suggest that the rally on Wall Street is about to come to an abrupt end, and the same could be said about Bitcoin and other crypto currencies. The only real hope for gold is a potential fall in the dollar, which could boost the buck-denominated commodity. But over the past 12 trading sessions, the dollar index has only fallen 3 times and it is currently up for the sixth consecutive day. The bullish momentum for the dollar is building up, in other words. Investors are almost certain of a rate hike tomorrow by the Federal Reserve. Last Friday's stronger US jobs report only helped to boost those expectations. But given that a 25 basis point hike is already priced in, it may be unable to push the dollar further higher when it happens. Still, the Fed's policy statement, growth forecasts and/or the dot plots may prove to be more hawkish than expected, which could underpin the dollar further. In addition to the Fed meeting, we will have the latest inflation (Wed) and retail sales (Thursday) figures from the US, too, which could provide further volatility for the dollar and therefore gold.

Gold vs. Bitcoin

A lot has been made of the recent upsurge in Bitcoin and how this has impacted the demand for gold and silver. While I agree this may have caused some investors to move their funds away from precious metals and into the cryptos, given the underperformance of the former, gold and bitcoin are two different animals and one can never replace the other. Aside from their obvious "physical vs. digital" difference, the market characteristics of the two are very different, too. For example, Bitcoin tends to attract more speculative interest while for gold it is a combination of speculative and investment inflow. In addition, Bitcoin has a known finite total supply whereas no one knows the total supply of gold for certain. What's more, gold investors whether using ETFs, futures or CFDs, are covered by anti-money laundering and other regulations, making it a safer form of investment in that regard than crypto currencies which are not regulated. However, all this doesn't necessarily make gold a better investment as clearly Bitcoin has been outperforming not just precious metals but basically every other financial asset recently. Equally, though, the parabolic-like rally makes Bitcoin extremely risky for those late in the party. So, I would treat the two assets as completely different products rather than substitutes.

Thus for gold to turn bullish again, it will probably be because of a correction on Wall Street or a pullback in the dollar, rather than a crash in Bitcoin. Other factors that might help support gold and silver include, among other things, geopolitical risks, inflation, and a sustained increase in physical demand or restriction in supply. These factors are near impossible to predict. But, ultimately it will be the direction of the dollar and stock markets that gold and silver investors will need to concentrate on the most going forward. Clearly, at the moment the market environment is not favourable for gold and this is reflected in its falling prices. Consequently traders should continue to look for bearish setups until such a time we a clear reversal pattern emerges.

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