Is gold's disappointing drop to $1,700 just noise? City Index asks
Matt Weller, global head of market research for FOREX.com and City Index, noted in a report Tuesday that gold is suffering in an environment that is "tailor-made" for the precious metal.
'The yellow metal has been one of the most disappointing assets on the planet over the last two quarters, with prices down nearly -20% from their August peak and -8% year-to-date," he said.
The comments come as gold prices have failed to attract any new investment flows. April gold futures last traded at $1,712.10 an ounce, down more than 1% on the day.
He noted some of the bullish factors that should be supporting gold prices include unprecedented money printing and monetary policy from central banks, growing government deficits worldwide, rising inflation, and a debasing U.S. dollar.
Weller said that there could be a few different reasons why gold is not responding as one would expect in this environment. But he pointed out that a significant factor could natural volatility or "noise" in the marketplace.
"It's always possible that the market's collective understanding of gold as a hedge against fiat currency debasement is no longer relevant, but more often, traders will ignore a seemingly relevant development before coming around to respect it again all at once," he said.
Weller said that gold's uncorrelated relationship to other financial market assets could be another factor weighing on the precious metal.
"Many long-term gold holders are most interested in the yellow metal's diversification benefits when their other investments are falling, an environment that we haven't seen much of late," he said.
Gold's selloff comes as investors shed other safe-haven assets like 10-year Treasury notes. Bond yields continue to hold near a one-year high above 1.4%.
Another factor taking the spotlight away from gold appears to be the growing popularity of cryptocurrencies. Bitcoin is managing to attract some buyers after its recent selloff. The digital currency is trading back above $50,000 on Wednesday.
Weller, though, is not convinced that this will be a sustainable trend in financial markets.
"Despite its technological merits, Bitcoin will never be able to approach gold's unfathomably long history of being a reliable store of value, so gold bugs would argue that this may be a more short-lived phenomenon," he said.
Looking at gold's technical outlook, Weller said that prices have to push back above $1,765 an ounce to neutralize the current bearish trend. Meanwhile, on the downside, he said that the next significant technical support level comes in at $1,690 an ounce.