The gold market has encountered an abrupt reality check plunging from highs of $1900 in June to trade at $1775 currently. Market charts clearly show how the recent sell-off put a dramatic end to the recent gold rally.
Gold formed a Double Bottom sometime in March and April. The precious metal then set the scene for a rally targeting higher ground that followed as expected. Amid this rally, there were high hopes that a Golden Crossover might be formed, that is when an upswing of the 50dma crosses past the 200dma.
Nevertheless, the yellow metal was pipped at the post by the recent sell-off. Both of these averages are nearly touching which means that it is not beyond the imagination and possibility that the pattern could still be formed. The Golden Crossover is normally a positive indicator of better things ahead, hence the interest of many analysts in it.
Additional examination of the market data and charts show that gold according to the RSI, MACD, and the STO is now strongly rolling in the oversold region indicating that a short-term bounce might be possible in the coming days.
There are a lot of contributing factors that might have been quite influential in the sell-off. But, currently here is an overview of just two factors; the ramifications of the G7 meeting that was held in the United Kingdom and the FOMC meeting on monetary policy.
Main Contributing Factors
The recent inflation figures from the United States rose by up to 5%. In doing that, they prompted the FOMC to respond as the figure was seen to exceed their target significantly. The FOMC then used the word ‘transitory’ to describe the surge in inflation and mentioned that it is not an issue or major challenge for the long-term outlook.
With some analysts remembering the rampant inflation that was witnessed in the 1970s, they fear that a word like ‘transitory’ will come back to haunt us all in the end. Nonetheless, the solution for any inflation challenge is regarded as a hike in interest rates and so they have to get a mention.
The Federal Reserve has in mind two rate hikes of 25 basis points each that would lift the interest rate to about 0.5% that is scheduled for implementation in 2023. That is considered to be a relatively tame response, but it might be that they did not want to scare the stock market to plunge into a panic selling frenzy by signaling the end of free stimulus money.
However, the US dollar was strengthened and as gold is inversely correlated with the dollar, it dropped with a nasty bump to reach this week’s level of about $1775. Experts say that the sell-off is an event that has happened on several occasions in the past as traders strive to position themselves to exploit the opportunities that come with any change in monetary policy.
Some analysts believe that the current conditions in the global economy and gold markets are not adequate to hold gold down indefinitely. As soon as the dust from the latest sell-off settles, gold will trade steadily once more. The market will then form a base and move up for the rest of the year.
The other notable influencing factor was that good old jolly which is known as the meeting of the G7. They concluded their jamboree with a unanimous agreement that the printing and spending of Fiat currencies need to continue to support the global economic recovery and mitigate the effects of the pandemic. Some analysts are worried and they were quoted as saying:
“The more Fiat currency we print more we dilute the value of the US Dollar, a fact that appears to have been overshadowed by the expectation of rate hikes which boosted the US Dollar, but one has to wonder just how long this charade can last.”
It is quite a delicate balance trying to keep the markets supplied with liquidity and also ensure that inflation is kept under control. A quick review of the chart for the US Dollar represents how well it has recovered in the past month.
The Takeaway
The bull market is always expected to be a ‘White Knuckle Ride’ and maybe we have not yet seen anything in terms of wild oscillations in all directions for the tiny market sector. It is proving to be a delicate balance of keeping the markets supplied with liquidity and also ensuring that inflation is under control.
It seems more and more like a choice between rapid inflation or a stock market collapse, and a case of choosing the best poison that applies to you. After buying physical gold several months ago, analysts say that investors need to also focus on precious metals mining stocks due to the leverage these stocks have on the underlying metal.
Some of the interesting stocks include SSR Mining Inc. (NASDAQ: SSRM), Sandstorm Gold Ltd. (SAND), Wheaton Precious Metals Corp. (NYSE: WPM), and Kirkland Lake Gold Ltd. (KL).
Many experts and analysts agree that the latest bull market was always expected to be a ‘White Knuckle Ride’, and wild oscillations might be on the way. Hence, investors need to hang in tight and should not let panic push them to sell their positions. Since gold is currently wallowing on the floor, it might be the perfect time to buy for the long term.
