Gold price drops $ 100 this week as economic outlook remains bleak, bitcoin competes for safe haven status

(Kitco News) Gold fell around 4% on Friday as investors sold off the precious metal amid rising market in US Treasury yields.

The February Comex gold futures were last trading at $ 1,839.40, down 3.88% on the day after breaking a key level of $ 1,850 an ounce.

“There are currently two catalysts that are causing the sale of gold. Rising bond yields and struggling economy. This leads to liquidation and a drain to cash, ”said Peter Hug, Global Business Director for Kitco Metals. “The yield on 10-year bonds has climbed above 1.1%, which is a significant move in higher yields. This morning you also had much more negative than expected employment data, indicating that the US economy could be struggling in the first quarter. “

The usual market reaction to bad economic news is a shift to liquidity, Hug noted. “Sales people get out of gold and end up in cash, roll out into the stock market or ten-year bond yields,” he said. “The vaccine rollout has also been disappointing. It will get worse before it gets better. “

Hug added that it was starting to look like what happened in March when gold sold out during the first COVID-19 lockdown cycle.

Contributing to the fall in gold has been a technical washout, Walsh Trading co-director Sean Lusk told Kitco News. “We still had a lot of long positions in the market. The locks are tightening. All the flow goes to the stock market. “

Rising Treasury yields are one of the main culprits behind the drop in gold prices, Lusk noted. “More than anything, you had a rise in Treasury yields, which lowered the appetite for gold, and we had a $ 100 wash this week,” he said.

The higher yields of Treasuries offer a bit of an offer on the US dollar, which is responsible for selling gold, said Edward Moya, senior market analyst at OANDA.

“Right now, the outlook for the dollar is mixed. Bearish dollar trading has become overcrowded. So investors are unwinding some bets on gold because there is an anticipation of a dollar rebound, ”Moya said.

Another factor is competition from bitcoin, analysts said. As the price of gold fell $ 100 this week, bitcoin rose by more than $ 10,000, hitting a new all-time high of over $ 41,000 on Friday.

“Bitcoin takes away a certain appeal here. Nothing rational behind it, ”Lusk said.

There is a big fundamental change underway for many investors, Moya said. “Expectations of gold to be a hedge against inflation have taken a back seat to cryptos, especially bitcoin,” he told Kitco News. “Right now, there is too much institutional interest diversifying away from gold.”

Moya finally sees the bitcoin bubble burst and gold rise to the idea that this is a great hedge against inflation.

Price levels

Going forward, the big question is whether or not the $ 1,850 level is met, analysts said.

The short-term drops of around $ 1,850 were bought in mid-December, which could also be happening here, Lusk noted.

Hug said he was surprised to see gold drop so much on Friday. “I thought the $ 1,875 level would hold. I don’t expect gold to cross $ 1,850 today. And as long as this level holds, the gold market is still in an uptrend. “

If gold falls below $ 1,850 then $ 1,825 is possible, and if that doesn’t hold $ 1,800 becomes support, Hug added.

Lusk is investigating whether $ 1,828 holds or not. “If we hit $ 1,800, we would be down about 5% year on year,” he said. “Almost $ 1,828 brings you back to $ 1,800. And $ 1,778 is the next level down. “

Moya added that he sees prices eventually stabilizing, but first he would like to see the $ 1,850 level hold. “Everyone will be focusing on the lows in November when we saw gold drop to just below $ 1,770. It will be the line in the sand. I would be surprised to see $ 1,800 violated, ”he said.