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What's Driving the Gold Price Sell-Off, and Can it Continue?

What's Driving the Gold Price Sell-Off, and Can it Continue?

2013-04-16 14:15:00
David Rodriguez, Head of Product
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Summary: Record declines in gold have coincided with sell-offs in the Australian Dollar. Yet correlations may be misleading. We look at fundamental drivers and gold price forecasts.

Correlation between the Price of Gold and the Australian Dollar/US Dollar Exchange Rate

gold_price_correlations_australian_dollar_forex_traders_body_Picture_1.png, What's Driving the Gold Price Sell-Off, and Can it Continue?

Price of Gold (lhs)

Australian Dollar/US Dollar Exchange Rate (rhs)

Correlation between the Price of Gold and the Australian Dollar

Gold prices started the week with the largest single-day decline on record, and most were left wondering what could possibly be driving such remarkable weakness. The short answer is that no one knows the true fundamental reason for gold price tumbles.

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Simultaneous declines in the US S&P 500, Dow Jones Industrial Average, and Australian Dollar have nominally driven cross-market correlations to gold substantially higher, but it’s critical to remember that correlation is NOT causality.

The long answer is that tremendous speculative interest below critical support near $1525 likely forced selling from those who remained heavily net-long.

On Thursday we warned that our proprietary Speculative Sentiment Index data showed retail FX traders were far too enthusiastic to buy into gold price weakness, and we warned against catching falling knives. Indeed, we most often use SSI as a contrarian indicator to price action; if most are buying, we prefer to sell.

Our warning on buying into gold price declines remains valid as crowds remain extremely net-long.

Forex Traders Remain Aggressively Net-Long Gold Prices

gold_price_correlations_australian_dollar_forex_traders_body_Picture_2.png, What's Driving the Gold Price Sell-Off, and Can it Continue?

Our SSI shows that there are currently 1.8 traders long Spot Gold for every one that is short. This is a significant shift from Friday when the same data showed 3.9 traders long per short, but we think that this is not necessarily a substantive shift in sentiment. Rather, many were forced to exit Gold-longs to cover margin requirements in their trading accounts.

It is certainly worth noting that short positions are up 16 percent since yesterday—clearly some are seeing this as an opportunity to sell the breakdown. Yet we’ll need to watch how crowds react in subsequent days to really get a gauge of the next likely move in gold price action.

Our Speculative Sentiment Index on Gold prices appears once per week on DailyFX.com via our Technical Sentiment page. Receive the SSI and other reports via e-mail by signing up for our e-mail distribution list.

Gold SSI is also updated on DailyFX PLUS twice per day. Use your live account credentials or sign up for a free trial for DailyFX PLUS.

Forex Correlations Summary

View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

US S&P 500

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.53

0.71

0.72

0.93

-0.88

0.91

-0.71

1 Month

0.41

0.07

0.52

0.62

-0.73

0.63

-0.05

3 Month

0.49

0.00

0.42

0.47

-0.50

0.51

-0.10

1 Year

0.47

0.38

0.28

0.63

-0.70

0.61

-0.44

Gold

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.91

0.90

0.90

0.90

-0.96

0.95

-0.78

1 Month

0.27

0.44

0.45

0.69

-0.62

0.76

-0.23

3 Month

0.14

0.24

0.23

0.50

-0.42

0.48

-0.20

1 Year

0.34

0.31

0.03

0.43

-0.35

0.43

-0.40

Crude Oil

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.51

0.72

0.94

0.87

-0.82

0.84

-0.41

1 Month

0.06

-0.03

0.21

0.54

-0.56

0.49

-0.10

3 Month

0.35

-0.01

0.19

0.39

-0.46

0.40

-0.16

1 Year

0.46

0.37

0.13

0.53

-0.59

0.48

-0.47

US 2yr Yield

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.92

0.78

0.93

0.85

-0.87

0.86

-0.67

1 Month

0.63

0.24

0.48

0.40

-0.50

0.52

-0.15

3 Month

0.48

0.02

0.40

0.18

-0.22

0.13

-0.01

1 Year

0.25

0.08

0.36

0.17

-0.25

0.09

-0.03

S&P 500 VIX

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.71

-0.65

-0.62

-0.93

0.89

-0.90

0.90

1 Month

-0.50

-0.09

-0.49

-0.63

0.73

-0.62

0.12

3 Month

-0.45

-0.03

-0.41

-0.43

0.50

-0.47

0.09

1 Year

-0.38

-0.28

-0.29

-0.54

0.57

-0.55

0.33

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

Receive future correlation studies and other reports via this author’s e-mail distribution list with this link.

David specializes in automated trading strategies. View an outline of the most popular sentiment-based trading signals—including download links—via this DailyFX article on trading systems.

Contact David and follow via Facebook and Twitter:http://www.facebook.com/DRodriguezFX

https://twitter.com/DRodriguezFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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