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Gold and Equity Markets Talking Points

- Gold fell below technical support Tuesday despite heavy triple-digit losses in the world’s main stock markets.

- Gold’s safe-haven appeal appears to be waning as the USD comes back into favor.

Gold Price Caught Between Equity Sell-Off and US Dollar Strength

The price of gold fell Tuesday despite all of the world’s stock markets dropping sharply lower as investors turned risk adverse. Normally, in times of turmoil, gold grabs a large safe-haven bid from investors seeking to diversify out of riskier assets, alongside other favorites including the Swiss Franc (SFR) and the Japanese Yen (JPY).

This time however the reaction was different as after a brief rally, gold fell into negative territory on the day and slipped below a noted Fibonacci retracement level of the December 2017 – January 2018 rally at $1,335.5/oz. This technical move leaves the precious metal heading towards a couple of support levels at $1,318.5/oz (50-day EMA) and the next Fibonacci retracement support at $1,316.6/oz.

Gold Price Chart in US Dollars (September, 2017 – February 6, 2018)

Gold Price Hit by US Dollar Strength

US Dollar Rallies on Higher Inflation, Interest Rate Hike Expectations.

Last Friday’s non-farm payrolls produced an unexpected boost to US economic projections with robust jobs growth and strong wages data. NFP payrolls rose by 200,000 – against expectations of 180,000 – while average hourly earnings were up by 0.3% on the month, making an annualized gain of 2.9%, the highest level since mid-2009. This data then boosted fears that inflation in the US could heat up over the coming months, increasing the number of interest rate hikes this year. The US Federal Reserve is widely expected to raise interest rates three times this year – each time by 0.25% - and last Friday’s labor data fueled market expectations that the FOMC may raise four times in 2018, or accelerate their hiking timetable.

This led the US dollar, and US Treasury yields higher, denting the value of gold, as a store of wealth. Monday’s sell-off in the equity space gave gold a boost but traders it seems are looking at the US economic backdrop more than equity valuations, and that points to further downside for gold in the near-to-medium term.

US Dollar Index (DXY) Price Chart (January 3 – February 6, 2018)

Gold Price Hit by US Dollar Strength

IG Client Sentiment data show 61.6% of traders are net-long of gold, normally a bearish indicator. The number of traders net-long is 1.6% lower than yesterday and 1.8% higher from last week, while the number of traders net-short is 2.7% higher than yesterday and 3.2% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests gold prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Spot Gold price trend may soon reverse higher despite the fact traders remain net-long.

We have a wide range of Trading Forecasts and Guides available to help traders make more informed decisions.

If you have any questions on gold, or this article, you can leave them in the comment section at the end of this article.

--- Written by Nick Cawley, Analyst.

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1