Gold erased $70 this week as the US dollar rose and crude oil sold. However, TD Securities sees a ‘big capitulation’ for gold possible. Chris Weston, Pepperstone’s head of research, says commodities are facing a two-front battle.
“This is a sign that gold is going to be significantly bearish”
cryptocoin.comAs you can follow, the US dollar index (DXY) has reached its highest levels in 20 years. Crude oil came close to $100. In this environment, the precious metal is trading near 8.5-month lows on Thursday. Daniel Ghali, senior commodity strategist at TD Securities, comments:
Just a few days after our put spread expires, it’s possible for a major capitulation event to occur underneath. So a strategist’s kryptonite! We are seeing evidence that the fastest exits from large commodity funds since the Covid-19 crisis could catalyze a series of successive liquidations from various speculative groups. This is a sign that gold will be significantly bearish in the coming sessions as participants are forced to sell in a gap.
“Gold funds see steepest rises since Covid-19 crisis”
Investors are exiting their long positions for fear of a potential recession that will negatively impact future demand. Therefore, this trend is observed in the entire commodity area. Broad commodity indices are being weighed down by big exits amid recession fears, according to the strategist. For this, Ghali notes that a money manager rushing for exits contributed to the decline in demand signals. The strategist continues, explaining:
AUM’s 15 largest funds recorded over $1 billion in fund outflows in the last week alone. It is also experiencing the steepest ascents since the Covid-19 crisis. A potential capitulation of this group contributed to the decline in all commodity prices. This helps explain the collapse in our real-time commodity demand indicator.
“Under sales accelerated a major CTA sales program”
Gold slumped below $1,800 and then below the key $1,780 support. This means indiscriminate selling by large commodity funds, the strategist says.
“Sales accelerated a major CTA sales program as trend followers reacted to the worsening momentum,” Ghali said. This also coincides with the coordinated sales of Shanghai’s largest gold traders as prices in CNY began to decline,” he adds.
“It is possible for the price of gold to enter a continuous downward trend”
Long positions have piled up since 2020, when the precious metal surged above $2,000 and set new records. Given the number of longs, this is an important red flag for gold. Ghali warns that the significant size this group has accumulated during the pandemic appears to be indifferent. In this context, the strategist makes the following statement:
In a liquidation vacuum, these positions are now vulnerable. Central banks faced a credibility crisis. Therefore, it is possible for them to stick to their fight against inflation and keep interest rates higher for a longer period of time. Therefore, a sustained downward trend is likely to occur.
“Commodities face a war on two fronts”
According to Chris Weston, Pepperstone’s head of research, calls for recession are triggering a massive decline in the commodities sector. Weston notes that short positions in copper, oil, gold and silver are growing rapidly. The ECB had to tighten to contain inflation amid rather bleak growth prospects. The European Union appears to be at risk of a severe recession. But Weston warns in a note Wednesday that the recession is more of a global problem.
According to the head of research, commodities are facing a war on two fronts. These are demand destruction and king USD. Weston notes that this has caused some intense bearish trends in commodities. “Commodities are the default expression of recession risk,” the analyst says. In this context, he makes the following assessment:
Receives crude oil and gold flow from customers. But for those who love momentum and trend, this is the place to look out. Short sellers are something to watch forward in commodities. If the USD continues to rise, maybe look at gold exposures in AUD or EUR (XAUAUD or XAUEUR). There may be scope for an upper range breakout. But even then, I will want to wait for a move to happen and let the market show itself.
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