Gold Slips Again on Liquidation Pressure as Equities Sink; Fundamentals Look More Positive

Precious metals took another hit yesterday, with gold back under pressure as stocks sold off once more. The metal has tracked equities closely of late, and the latest decline appears to be tied to investors unwinding holdings to make up for losses in other parts of their portfolios.

Consider a fund that holds stocks, gold and government bonds to see how this works. If some of those stocks crash, the fund takes a hit on leveraged positions. It might then need to free up cash for margin calls, cut leverage or handle investor redemptions. Instead of dumping just the assets behind the losses, it can sell whatever is easiest to get rid of fast. Gold tends to fit the bill because it is very liquid and can be sold without much trouble.

The underlying drivers, including real yields, have actually been supportive for gold. Real yields have dropped notably, with inflation expectations little changed even as oil prices climbed; nominal Treasury yields also declined as the equity losses sent investors toward havens.

A notable divergence has also opened up between spot gold and ETF holdings. As a rule, spot prices drive inflows and outflows from ETFs, but this time technical forces appear to be holding gold back rather than fundamentals.

When the artificial selling pressure finally lifts, a sharp and fast recovery is possible. The calendar is also moving toward a seasonally strong stretch from December to January. The challenge lies in timing. Traders can either use key technical levels or hold out for a fundamental trigger, such as progress in US-Iran negotiations, dovish remarks from the Fed, or softer US economic data.

Gold Technical Analysis: Daily Timeframe

On the daily timeframe, gold (CFD contract) has stretched its losses and is now approaching the major support zone around 3,885. Should the price reach that area, buyers are expected to enter with risk defined beneath the major upward trendline, positioning for a push toward fresh record highs. Sellers, meanwhile, will be watching for a move below the trendline to add to bearish positions with a next target of 3,500.

Gold Technical Analysis: 4-Hour Timeframe

On the 4-hour timeframe, price broke below the minor upward trendline yesterday and extended the slide as sellers added to bearish positions targeting 3,885. If a rebound comes before that level, sellers are likely to use the downward trendline as resistance, with risk above it, and continue aiming for new lows. Buyers will instead need a break higher to set up a move to new highs and then target a rally toward 4,400.

Gold Technical Analysis: 1-Hour Timeframe

On the 1-hour timeframe, a minor downward trendline is setting the bearish tone for this timeframe. Sellers can be expected to keep leaning on that trendline, with risk above it, and continue targeting new lows. Buyers, meanwhile, will wait for a break higher to bounce toward the major downward trendline. Today's average daily range remains a key level.

Catalysts Ahead

The final item on this week's schedule is the US Employment Cost Index, due today.