After a record short tenure fraught with extreme volatility, British Prime Minister Liz Truss has resigned. Gold, both in US dollars and British pounds, stagnated amid this development. However, gold remains at a ‘critical juncture’, albeit with a lack of response or unresponsiveness, according to experts. Also, the yellow metal risks another strong sell-off.
Why did the markets not react to the developments?
After a failed tax cut budget that has thrown financial markets into chaos over the past few weeks, Truss has faced open rebellion within his own Conservative Party. Spot gold, priced in US dollars, was largely unchanged after the resignation. It later rose 0.72% on the day to $1,641.60. Spot gold denominated in British pounds was also unchanged. However, prices fell 0.06% on the day to £1,451.13.
According to DailyFX strategist Michael Boutros, the main reason for this lackluster reaction is that markets have priced the news largely before it even happens. Boutros cites a report by British finance minister Kwasi Kwarteng. In this context, he shares the following assessment:
When we got our first resignation last week, the writing was on the wall. They were not going to launch all these new tax cut measures and initiatives to assist energy policy. It was clear that this was not going to work. Any trade based on sterling will be open to great volatility. That’s why investors need to accept this before they go in.
“Gold is still at a critical point”
Gold is currently at a crossroads. Therefore, it is possible that subsequent price levels will significantly affect future price movements. Michael Boutros has this to say about it:
The precious metal is still at a critical point. If this thing breaks the January 2020 high of $1,611, that’s a real big deal. If it closes below this level, there is nothing to hold $1,560 or even $1,500.
“Game over if gold closes below this”
cryptocoin.comAs you follow, gold came very close to falling below this level last month. However, it managed to turn things around at $1,614. Boutros continues his statements in the following direction and warns investors:
If we close below that, it’s game over. Because the larger position for gold has been the double top formation. If this formation, which includes the 2020 and 2021 peaks, is correct, the measured move would be towards $1,300. Risk below these levels is really detrimental to bullion from a long-term perspective.
“We will dance on the edge of the cliff until we do this”
On the upside, gold needs to close above $1,730. “We’re going to dance on the edge of the cliff until we do,” says Boutros. The good news is that the base ground is starting to look better for the precious metal. Boutros explains these views as follows:
We are likely to finally get a quote for the yellow metal. Whether it’s an increase in market turmoil, a bigger drop in stocks, or a disruption in the war. It’s hard for me to see an ongoing sale here.
Also, the end of the US dollar rally is great news for the precious metal struggling under the weight of the strong dollar. According to Boutros, the biggest problem is that we’re facing this decline in and below because we continue to see interest rate expectations rise. Boutros concludes his assessments as follows:
The expected terminal rate for Fed funds has now increased from 4.6% to 5%. The dollar is a bit depleted here. The good news will only be very good news for the dollar.
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