A big sell-off on Friday has been a big shake out, but as support begins to form has given an opportunity to buy. Looking past the near term volatility, we remain bullish on gold on a medium term outlook and are buyers into weakness.
The massive gold sell-off on Friday seems to have been borne out of big volume on gold futures markets. The reason, being margin calls. When the markets reach a point of capitulation, everything has to be sold, in this case even gold had to go as part of the mass portfolio liquidation. Selling gold in such a time of huge market fear can have little other real explanation.
Also on Friday, there was something of a shift in sentiment again. The comments from Jerome Powell (Fed chair) that the Coronavirus poses “evolving risks to economic activity” has been taken to mean that the Fed is ready to ease policy. This is gold supportive again.
If there has been a big shake out of portfolios and markets begin to stabilise/recover on Powell’s comments, the appetite to buy gold will resume. Already this seems to be taking hold this morning.
- $1591 – intraday low, 2nd March
- $1579 – 2nd March low
- $1565 – 28th February low
- $1611 – 8th January high, old key breakout
- $1625 – 25th February low
- $1640 – intraday high, 28th February
Conventional wisdom cannot explain why gold was sold off so massively on Friday. The explanation seems to have been more behind a capitulation of selling across assets as portfolios were struck by margin calls. Gold closed -3.5% lower on Friday (-$57) in a move that effectively rebounded off the 50% Fibonacci retracement (of $1445/$1688) at $1567. We have been advocates of buying gold into weakness and whilst this corrective move has gone beyond our expectation of an unwind from the February rally, we now see this move as being a real buying opportunity. The positive reaction today on gold is encouraging for support levels and close back above $1591 (old breakout) and the 38.2% Fib (at $1595) would be an encouraging sign. Momentum indicators have been unwinding from their bullish positioning are still with the unwind, but RSI is around 50 so the bulls at least have renewed upside potential to factor now. The hourly chart is beginning to show more positive indication this morning, but the bulls need to build on this move and hold the initial support $1579/$1590. Furthermore, the hourly RSI needs to move into the 60s to suggest recovery momentum is more than a bull trap this morning. Closing back above $1611 would suggest the bulls back on track.