Gold certainly has been the broader market's central focus, the bulk of the move this morning into 1678 has been driven by flow and largely a liquidation of long positions from leveraged accounts. Not much of the forced selling has abated and we’re now seeing buyers emerge and Gold is well off the lows. Could this be an opportunity for traders to keep firmly on their radar? The push below the 29 June swing low of 1750 would have seen stops triggered and the fact this has taken place on the Monday open means reduced liquidity in the underlying exasperated the pace of the drawdown. By 10:15 AEST 50k gold futures contracts traded and our volumes across the desk have been huge relative to normal volumes.
Contrast this move to other asset classes and we see S&P 500 futures -0.3%, the USD is up smalls, AUDUSD is -0.2%, and US Treasury futures are down a tick. So, the move in Gold has naturally stood out and come up front and centre on the radar.
There's generally a fundamental reason when these flow-based moves or liquidations play out – in this case, I’d argue that the Gold market was already moving on Friday from 1800 to the close of 1763. Asia has now had their chance to react and as the price fell on open, it caused a wave of leveraged longs across market players to fold. The fact that US payrolls were just so hot has seen a perception that perhaps the USD may have better times ahead. While US Treasuries may push higher (in yield) and when the real returns on offer in the bond market are looking far more compelling, yield less assets, such as gold are typically shunned.
As I wrote this morning, the market is not just talking about when the Fed tapers its asset purchase program, but the conversation has moved on to the pace of the taper and rate hikes in the future. For context, the December 2023 swap has moved 26bp higher in the last week, and this is now 15bp above the Fed’s median dot plot projection – rate hikes being priced is good for the USD, a headwind for gold.
All eyes are on US CPI this week, but if this vol persists, taking the timeframe down seems prudent and when range expansion picks up, we consider position size above all else. We manage risk, but when there's movement there's opportunity, especially when flow can cause artificial selling and emotional decisions.