International spot gold continued to come under pressure on Tuesday, touching as low as $1,707.67 an ounce, indicating that bears remain strong. Gold has been the worst performer on the Bloomberg Commodity Index over the past two months and is on track for its worst start to a year in 30 years. With central banks in full support of the economy, gold is unlikely to mount an effective counterattack in the short term, and can only hope to do so in the longer term. But there is still some way to go before the crucial $1,650 / oz level triggers a technical recession, so the bulls are far from a complete rout.
The head of China’s banking and insurance regulatory commission, Guo Shuqing, commented on financial assets within days, expressing concern that bubbles in foreign financial markets could one day catch on. Connor Campbell, of Spreadex, said warnings of a bubble from China had dampened risk sentiment. “On Tuesday we saw European investors starting to falter.”
Analysts say all eyes remain on the bond market, but that if relative calm holds for a few more days, markets may be open to a return to greed. But even so, the mood is delicate, and with Fed Chairman Colin Powell having a lot to say on Thursday, investors will be watching for further clues about how this week will unfold.
In terms of the outbreak, while more COVID-19 vaccine has been authorized for emergency use, scientists fear that with so many people infected in Brazil, more variants will emerge. “If Brazil does not control the virus, it will be the largest mutation laboratory in the world.” Duke University epidemiologist and neuroscientist Miguel Nicolelis. “Not only could it be the epicentre of a pandemic, but it could also be the central focus for the spread of deadlier and more contagious variants. It’s for the benefit of the entire planet.”
Senate debate on the massive $1.9 trillion fiscal stimulus plan could begin as early as Wednesday, a Senate Democratic aide said. In addition to the minimum wage issue, the U.S. Senate is under pressure to pass a bill by the middle of the month, when additional unemployment benefits that millions of Americans who lost their jobs in the outbreak have relied on expire.
On the technical side, MarketPulse wrote that gold’s failure at the breakout point yesterday is a strong sign that long-term bullish positions are failing. Instead of being snapped up on dips to $1,800 as it had been before, gold found short positions on any meaningful rally.
At the same time, the SPDR Gold ETF continued to see significant outflows, suggesting a further erosion of confidence. Gold’s resistance is at $1725 and $1760, the Fibonacci 50% and breakout level.
On the downside, its next support is at $1680, the 61.80% Fibonacci retracement. A loss of this level clears the way for a deeper fall into the $1600 / oz area.
Chris Weston, Pepperstone’s head of research, also responded to the market’s expectations by saying that although sentiment in the gold market had become extremely bearish, it was unlikely to turn around any time soon. Investors need to keep a close eye on Treasury yields as the market appears to disagree with the Fed on the likely timing of future rate increases.
TD Securities analysts explain: “The rise in US Treasury yields and the steepening of the curve are changing the relative cost of funding and increasing the opportunity cost, making many investors reluctant to own gold. As the price of the 10-year Treasury rises, the market is likely to see more long liquidations and new short entries.”