Gold futures are trading flat early Tuesday after posting a technical reversal the previous session following a test of its lowest level since August 11. With the trend down, the price action probably reflected short-covering and position-squaring since the bearish traders have to get out of the way before the real buyers can gain control. In other words, gold went up because weak short decided to bailout, not because of the presence of strong buyers.
At 03:13 GMT, December Comex gold traders are trading $1763.90, up $0.10 or +0.01%.
Monday’s short-covering rally was likely fueled by a dip in Treasury yields and some hedge buying tied to the steep sell-off in the global equity markets. The strong U.S. Dollar likely put a lid on the rally.
Gold did not go up because it is a safe-have asset. Gold is an investment, not a safe-haven. That’s old school thinking. The true safe-havens are U.S. Treasurys, the U.S. Dollar and the Japanese Yen. When there’s trouble like potential contagion from the financial turmoil coming out of China, investors want safety and liquidity. To some, gold is a safe-haven, but the liquidity can’t compare to the Treasury and foreign currency markets.
A few weeks ago I read some analysis on FXEmpire.com where a fellow was saying gold would rally during an upcoming stock market crash. On September 2, the benchmark S&P 500 Index hit an all-time high of 4545.85. On September 20, it reached a low of 4305.91. This is a 5.28% loss. On September 3, December Comex gold hit a high of $1836.90. On September 20, it hit a low of $1742.30. This is a 5.15% loss. So if you do the math, gold has outperformed the S&P 500 Index since September 3.
I’m being sarcastic, of course. My point is, the direction of gold is controlled by interest rates and at time the U.S. Dollar. Gold tends to react to stock market crashes when the Federal Reserve floods the financial system with massive amounts of liquidity. I don’t they’re going to do that now just one-day before the start of a two-day meeting where they will be discussing whether to begin pulling liquidity out of the market.
So if gold rallies from current price levels, the move will likely be fueled by short-covering and position-squaring. If the stock market drops another 5 to 10% over a short period of time, the Fed may have to do something, but they don’t have a lot of tools left in their toolbox with interest rates already sitting near zero.
The chances of a powerful gold rally are slim because I don’t think the Fed will lower rates because they can’t and I don’t think they are going to increase their bond purchases to provide more liquidity because they are close to reducing their massive stimulus program. At best, the Fed will leave its bond purchases at current price levels and take a pass on tapering until later in the year when the stock market could be more stable.
Even if gold does pop to the upside, it’s likely to be another shorting opportunity.