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  •  Bulls have lost their grip, besides a very near term possibility to the upside, bets are firmly being laid on the downside.
  • The contrarians will be eyeing developments very closely at this juncture.

The price of gold has lost steam of late. While the upside case has been made loud and clear, there are arguments for a deep correction, not just stemming out of risk-on scenarios, but this is a double edge sword. On one hand, risk-on will lead to an exodus of speculative bids and could in itself trigger a strong downside correction, setting-off stale sell stops.

On the other hand, should global economies experience vast amounts of bankruptcies, while the upside in gold would be a risk-off play, margin calls on long equities and risk assets could see gold suffer, so the bulls may have to wear some pain for longer.

Analysts at TD Securities weigh in with their fundamental analysis and argue that “as risk appetite continues to firm, the allure for precious metals is fading in the eyes of safe-haven buyers”.

While ETF holdings of gold continue to rise at a fast clip, open interest in gold futures continues to subside following the EFP blowout with some preliminary evidence that OTC trading has captured some market share. As a result, liquidity remains scarce —which could suggest that flow from liquidity takers, such as CTAs, would have an outsized impact in this environment. In this context, while not our base case, gold prices are at risk as further downside below $1690/oz could catalyze CTA liquidations that may have an outsized impact as a result of the scarce liquidity environment.

Distribution could be the next chapter in the bullish gold story

The following charts offer a playbook for short XAU/USD:

There is scope for a playback towards prior structure o he daily chart before the next bearish impulse. Below here, we can see the next likely bearish target areas and structures.

4HR chart below shows a bearish outlook from MACD and price below bearish 20 moving average approaching the 200 MA.

When the dust settles, we continue to expect gold prices to rally as capital seeks shelter from a prolonged period of negative real rates. 

– TDS