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What’s up Gold? Gold bulls fail to regain control after the Fed

June 17, 2020 10:00

Source: Economic Events June 17, 2020 - Admiral Markets' Forex Calendar


After the Fed reinforced its dovish stance last Wednesday, and the Fed dot plot suggesting that it will keep interest rates at 0% at least through the end of 2022 while continuing to buy USTs and MBS at the current pace, we see a willingness to flatten the 2-10-year-US-yield curve once again. Because of this, Gold's technical side has brightened once again.

But after an initial bullish stint, Gold suddenly dropped, and reaching 1,700 USD because its focus again.

This is surprising, as Equities dropped heavily too, alongside the Dow Jones Industrial Average dropping 6.9% on Thursday the day after the Fed, marking its 27th largest 1-day decline in history. The volatility index VIX spiked 48% that same day as well, making it the 7th largest 1-day percentage increase in history.

For us, it seems as if the Gold weakness may be driven by two factors:

  1. Margin Calls kicking in after Equities saw an enormous run from its March and yearly lows, while precious metals like Gold and Silver saw heavy gains, and no funding to finance Equity positions.
  2. The Fed's balance sheet only increased by 4 billion USD over the last week, pointing to what is, by far, the smallest increase since February 2020.

That said, in our opinion it should be only a question of time to see the Fed increase the pace of its QE again, which should then act as a very bullish driver for Gold. As long as the precious metal trades above 1,660 USD, this could set the path up to the current all-time high of around 1,920 USD.

On the other hand: a drop below 1,660 USD could trigger a deeper correction, driving Gold below 1,600 USD, even though such a move should be considered only short-term:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between March 18, 2019, to June 16, 2020). Accessed: June 16, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.


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