Gold futures finished marginally higher last week and in the lower end of its weekly range after hitting a more than seven year high earlier in week. The two-sided price action was event driven. The rally was tied to an escalation of tensions between the United States and Iran early in the week. The sell-off was fueled by profit-taking after those same tensions were dampened by rhetoric from officials from the two countries.
Last week, February Comex gold settled at $1560.10, up $7.70 or +0.50%.
We all know the headlines driving the price action, but the price behavior was also fueled by movement in the financial markets. Treasury yields fell early in the week, making the U.S. Dollar a less-attractive asset, while increasing demand for dollar-denominated gold. Demand for risky assets also fell on the first headline, encouraging investors to seek protection in lower-yielding assets.
Gold prices fell as investors returned to the higher-yielding assets. Tell those gold buyers caught at the top of the price spike that gold is a “safe-haven”. I think it’s better to conclude that investors periodically shift their money from higher-yielding assets to lower-yielding assets, and vice-versa. When dealing with real money, there is no safe-haven. You either make money or you lose money.
Gold is an investment and has to be treated as such. Therefore, it’s going to follow the same laws that control other investments. Buy it when it’s cheap, sell it when it’s expensive. Buy it when no one wants it, sell it when everyone wants it.
There is also no one event or news story controlling gold either. When the support base was being built in November and December, buyers were accumulating gold on the hope that a U.S.-China trade deal would weaken the U.S. Dollar’s appeal as a hedge. And they were right, gold firmed as the dollar weakened against a basket of currencies as investors shed long positions placed as protection against an escalation of the trade war.
I couldn’t find any evidence that investors were stocking up on gold because they feared a missile attack from Iran. If you knew in advance, congratulations. You have better sources than me and U.S. senators.
The point I’m trying to make is that if you see value in an asset and can assess the risks, you buy the asset. The story doesn’t matter. What matters is some investors are good at accumulating an asset when it’s not popular, and selling it to those who will pay anything to get into the game because of a headline.
If you’re a gold investor rather than a gold speculator chasing the news then the first area to watch for value this week is $1533.20 to $1514.30.
Let’s just say, if you found some excuse not to buy it at $1453.10 on November 12 and you didn’t like it when it hit $1613.30 on January 8, then why not at least take a look at it at 50% to 61.8% of the two much range.
In the absence of any major geopolitical events this week, traders are likely to react to U.S. inflation and retail sales reports. There’s also the ECB meeting minutes and a speech by ECB President Lagarde. China’s GDP numbers on Friday could also move the market.
In my opinion, the near-term direction of gold will be determined by trader reaction to $1533.20 to $1514.30. Look for the upside bias to resume on a sustained move under $1533.20. Selling pressure is likely to increase under $1514.30. Prices could fall until gold investors find value.
I think we’re going to be shown how badly the gold bulls want the precious metal on a pullback into $1533.20 to $1514.30.
This article was originally posted on FX Empire
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