Enter XAU/USD trades according to the US employment data

Gold price easily climbed up to the target of $1340 per ounce, outlined in the January forecast, and dramatically crashed down. Gold futures have closed 6 consecutive trade sessions in the red zone, which is the longest losing streak over the past at least two years. It started with exiting the longs for gold ahead the release of the US GDP data. Once it had been known that the US economy was expanding in the fourth quarter faster than it had been expected, as traders started selling XAU/USD.

In the week, ended February 19, financial mangers sharply increased net longs for gold from 42619 to 82377 future contracts. CFTC publishes the data with a time-lag, due to 35-day government shutdown in the USA; however, speculators were clearly interested in bullish positions. There were many traders, willing to pick up the uptrend, and this ended badly for most of them. The XAU/USD rate dropped down to its 5-week low, the biggest ETF, SPDR Gold Shares featured the worst daily outflow (-$496 million) since February, 2018.

Dynamics of capital flows in SPDR Gold Shares

Source: Bloomberg

Analysts’ tries to explain the crash look confusing. As major bearish drivers, they suggest the easing of the US-China trade conflict, along with the UK unwillingness to extend Article 50 of the Treaty of Lisbon. Improved global risk appetite, as a rule, result in the precious metal drop. However, remember 2018, when trade wars supported the U.S. dollar revaluing the a decline in XAU/USD.

In my opinion, gold crash was triggered by the growth of the Treasuries yield, a decline in the likelihood of the Fed’s rate cut from 14%-15% down to zero, as well as a clear division between income assets and safe-havens. Previously, these two kinds of assets could be moving in sync, but currently, they are moving in the opposite directions. Treasury yields are rising as the US economy looks stronger than it was expected, investors are concerned bout a default due to the national debt ceiling and better outlook for global GDP growth. According to the US Treasury Secretary Steven Mnuchin, the federal government resorted to “extraordinary measures”, which increases the risk that it will fail to pay its bills. Something like that already occurred in 2011 and in 2013, when the US bond market rates were up by 0.04 bps and 0.08 bps on average.

Dynamics of Gold and Treasury yield

Source: Trading Economics 

I, personally, believe that investors were too into both gold buys and sales. At the turn of winter and spring, it cost bulls a lot. Now, it may hit bears. If the clear division into risk-on and risk-off is back to the market, the correction of the US stock indexes will encourage the XAU/USD buyers. In my opinion, investors are so excited about the alleged progress in the US-China trade talks that they have drawn S&P 500 up too high. If the US employment data turn out to be weaker than expected, it will be relevant to enter gold longs with the first target at $1310 per ounce.

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Price chart of XAUUSD in real time mode

Gold was knocked off the pedestal

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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