Make Kitco Your Homepage

Gold slides as stocks rise; traders still like gold long-term

Kitco News

(Kitco News) - A big comeback in equities sent gold futures sharply lower Tuesday, but some futures-market strategists and traders look for the yellow metal to eventually right itself since interest rates are low and there is uneasiness with valuations in equities.

As of 10:05 a.m. EST, Comex April gold was $19.40 lower to $1,563 an ounce. The contract bottomed at $1,566.20, its weakest level since Jan. 24.

Meanwhile, the Dow Jones Industrial Average was around 400 points higher in early trading after also rising on Monday. Previously, stocks had been on the defensive amid worries about the economic impact of China’s coronavirus outbreak.

“Looking at gold, obviously, with the U.S. equities markets continuing to power higher on yesterday’s turnaround, that has really caught a lot of people off guard who were planning for more follow-through selling to the downside (in stocks),” said Phillip Streible, chief market strategist with Blue Line Futures.

Right now, there seems to be a “fear of missing out” on moves in a number of stocks – such as Telsa – that are surging sharply, he continued.

All of this has taken away some of the previous safe-haven buying in gold that occurred when stocks were falling amid the virus worries. U.S. dollar strength is also playing a role in gold’s pullback, said Sean Lusk, co-director of commercial hedging with Walsh Trading.

“As these equities firm higher, those recent longs [bullish traders] in gold are taking it on the chin and probably getting stopped out,” Lusk said.

Traders get “stopped out” of a market when prices hit chart points that automatically trigger pre-placed sell orders, as market participants look to either limit losses or protect prior profits.

Still, “I like gold,” Streible said.

He called gold’s downdraft “slightly damaging” on the technical charts. However, the metal remains above what he sees as the key chart point of $1,542.80 an ounce, which was the low on Jan. 14.

“If we close below there, gold has some real trouble and we’re probably going to have a continued washout,” Streible.

Lusk listed downside chart-support points of $1,551, $1,536 and a longer-term trendline around $1,530. Should the latter fail, April gold conceivably could fall all the way to around $1,470, Lusk added.

“I think longer term, gold is still in an uptrend,” Lusk said. “But you’re going to have some violent corrections in the near term because there are so many longs in the market.”

The most recent positioning data from the Commodity Futures Trading Commission showed that as of Jan. 28, money managers were net-long, or bullish, by 219,938 futures contracts. This is not far below the 232,732 lots from the end of 2019. This eventually means selling whenever these speculators opt to exit their positions, and this has tended to happen whenever the net long has gotten up around 230,000, Lusk added.

Ultimately, Streible and Lusk both look for the metal to draw some support from continued low interest rates.

“We haven’t reached any important thresholds with the Fed’s inflation targets. So they’re going to be sitting on the sideline,” Lusk said. “We’ve seen central banks around the world continue to amass gold.”

Streible also noted that the Federal Reserve is still active in the repurchase-agreement market, and the Treasury yield curve has been inverted at times lately, typically seen as an indicator that not all may be well with the economy.

“I think gold is a good investment right now,” Streible said. “This U.S. equity market is like a huge dam. A couple of cracks are starting to show in it. If the dam breaks, we’re going to see a massive correction in equities.”

And if so, investors in gold could benefit from rising prices, he continued.

Lusk added that gold has been a headline-driven market for some time now.

“That means on the next [new] headline, we could rally by 30 or 40 bucks and trade back over $1,600,” Lusk said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.