Gold price plummets $100 this week as economic outlook remains grim, bitcoin competes for safe-haven status

(Kitco News) Gold tumbled around 4% on Friday as investors sold off the precious metal amid a rise in the U.S. Treasury yields market.

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

“There are two catalysts right now that are causing gold to sell-off. Rise in bond yields and the economy looking in trouble. This is causing liquidation and flight to cash,” said Kitco Metals global trading director Peter Hug. “The 10-year bond yield has climbed above 1.1%, which is a significant move in yields to the upside. This morning you also had employment data that was much more negative than expected, which indicates that the U.S. economy could be in trouble in Q1.”

The usual market reaction to bad economic news is a move into cash, Hug noted. “Commercials are getting out of gold and getting into cash, deploying into the equity market, or ten-year bond yields,” he said. “There has also been a disappointing vaccine rollout. It will get worse before it gets better.”

Hug added that it is starting to look similar to what happened back in March when gold sold off amid the first round of COVID-19 lockdowns.

Contributing to the move down in gold was a technical washout, Walsh Trading co-director Sean Lusk told Kitco News. “We still had a lot of longs in the market. Lockdowns are tightening. All the flow is going into the stock market.”

The rise in Treasury yields is one of the main culprits behind the lower gold prices, Lusk noted. “More so anything, you had an uptick in Treasury yields, which decreased the appetite for gold, and we got a washout of $100 this week,” he said.

The higher Treasury yields are providing a bit of a bid for the U.S. dollar, which is responsible for the selloff in gold, said OANDA senior market analyst Edward Moya.

“Right now, there is a mixed outlook for the dollar. The dollar’s bearish trade has gotten overcrowded. So, investors are unwinding some gold bets because there is an anticipation of a dollar rebound,” Moya said.

Another factor is bitcoin competition, according to analysts. While gold prices lost $100 this week, bitcoin rose more than $10,000, hitting a new all-time high of above $41,000 on Friday.

“Bitcoin is taking away some appeal here. Nothing rational behind that,” Lusk said.

There is a big fundamental shift happening for many investors, said Moya. “Expectations for gold being an inflation hedge has taken a back seat to the cryptos, especially bitcoin,” he told Kitco News. “Right now, there is too much much institutional interest diversifying away from gold.”

Moya sees the bitcoin’s bubble eventually bursting and gold rising on the idea that it is a great inflation hedge.

Price levels

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

The near-term dips around $1,850 have been bought in mid-December, which is what might happen here as well, Lusk noted.

Hug said he was surprised to see gold move down so much on Friday. “I thought $1,875 level would hold. I don’t expect gold to break through $1,850 today. And as long as that 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 looking at whether or not $1,828 holds. “If we hit $1,800, we would be about 5% down on the year,” he said. “Close under $1,828 takes you down to $1,800. And $1,778 is the next level down.”

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