Gold just took a ‘Bitcoin-esque’ tumble — here’s the key support level to watch
Gold and Bitcoin are two commodities engaged in a battle for ‘store of value’ supremacy (particularly in light of BTC’s huge rally).
But according to Jeffrey Halley, senior market analyst at OANDA Asia-Pacific, another safe haven asset — US bonds — is sparking some jitters on gold markets (BTC has sold off too).
When Stockhead caught up with pro investor Luke Winchester last week, he flagged rising bond yields as one 2021 theme the Oracle Investment team is paying “close attention” to.
Amid the US political chaos last week, the 2020 status quo largely remained in place as big tech companies paced gains on the S&P500.
However, the bond market is rumbling.
Yields rose (which means bonds got sold off), as benchmark US 10-year treasury yields climbed above one per cent for the first time since March.
That in turn prompted what Halley described as “Bitcoin-esque” volatility on the gold charts, as prices fell more than three per cent on Friday.
In a research note this week, Halley noted that gold prices are “extremely sensitive” to ‘real’ interest rates (the yield on US rates, less inflation).
Even still, “the reaction to the modest rise in US yields has surprised me,” he said.
With US rates anchored at zero, the real rate of interest has been in negative territory. It remains there, but the gap between nominal yields and inflation has narrowed.
Cue the ‘long-gold’ positions getting closed out — one of the many ways that rising yields can make markets twitchy.
“Gold markets suffered a judgement day Arnold Schwarzenegger would have been proud of on Friday,” Halley said.
He attributed the initial move to rising yields, which in turn saw USD gold prices fall below their 100-day moving average (DMA) of $US1,895 an ounce.
“That sparked a disorderly rush for the exit doors by speculative longs that had been remorselessly squeezed since the rally of last Monday,” he said.
By the time US markets closed, prices had dipped to around $US1,840 an ounce.
Asian markets picked up where the US left off on Monday, sending gold below $US1,820/oz for the first time since December 2 before it found some support.
That was despite a risk-off tone across Asian markets (usually good for gold), as the ASX Small Ords index fell by more than 1.5 per cent.
After breaking through the 100-DMA, Halley said gold’s 200-DMA — $US1,837 — is now the key level of support.
“A daily close below this is a signal that the downward correction will continue,” Halley said.
And for clues to the gold price, many roads lead back to the US treasury market.
“If US yields continue moving higher, gold will face more selling pressure into a market that looks like it is still speculatively long,” Halley said said.
Beyond the 200-DMA, Halley flagged the “critical long-term support” level at $US1,760 an ounce.
“I have highlighted $US1,760/oz as a long-term structural low for gold prices previously,” he said.
As long as $US1,760 isn’t breached, the USD gold market will remain in a broad long-term uptrend.
However, “a failure at $US1,760 would call for a reassessment, and gold’s losses in that scenario could extend to $US1,650”, he said.