Lagos — After such an emphatic rally, which took the gold price to $3500 and to grossly overbought readings on a number of metrics, the news over the past 12 hours have offered a signal for some to cut back on an extended long position and bank some profits.
Tariff tensions now appear to have peaked
The news flow around US-China relations appears to be improving, albeit at the margin, and there seems limited scope for relations to deteriorate further, with the potential of behind-closed-doors negotiations hinting at a de-escalation.
Political noise around Fed independence has also faded, with Trump saying Jay Powell’s position as Fed chair is indeed safe – gold was a default hedge against the potential significant fallout from Trump progressing Powell’s departure and the further erosion of confidence this action would have towards holding US assets.
Technical landscape
With Trump’s comments on Powell’s position and on US-China tariffs coming during the gold futures (and Pepperstone’s cash pricing) closed period, upon the reopening we saw the gold price gap down $64 to $3316. From here, that the buyers stepped in, pushing the price higher to close the gap at $3380 – gaps are there for closing, but it’s what happens once filled that matters – hence the subsequent rejection of $3380 seen through Asia, with the selling flows increasing, has seen price pull back to the lows of the day. A clear sign that we are seeing a change in the market structure.
With so much of the gold’s cumulative rally since 7 April attributed to moves in Asian trade, the failure of Asia-based traders to support the gold price today is quite telling and perhaps suggests increasing downside risk.
While the market looks for direction, should the pace of selling increase, technical support is seen at the psychological level of $3,300, ahead of $3291 (the 38.2% fibo of the rally from $2956 to $3500) and $3245 (the 14 April breakout high) – whether the buyers step in and support at any of these levels is yet to be seen– but should we see increasing downside momentum, we should consider that there is a still a highly elevated long position that would need to managed and cut back from the fast-money traders. A resurgent dollar or higher US equity prices could also test gold’s resolve, making further profit-taking of gold longs into rallies a possible tactical move.
The Bullish Fundamental Case for Gold
Yet despite a reduced need to hedge against the tariff news flow or the removal of Jay Powell, the fundamental backdrop still supports elevated gold prices.
One compelling reason to hold the metal is the evolving risk of a US economic recession in the coming 12 months, currently implied in the prediction markets at 52%. In an environment where the US recession probability could go either way, where the data will guide the market’s assumptions, gold shines as a powerful safeguard against downside growth risk for institutions and traders alike.
Should the US data flow deteriorate as many expect, a recession will soon become the market’s base case and suggest easing (from the Fed) of monetary policy would also support gold’s investment case. Recent communication from Fed officials emphasizes an uncertain outlook for monetary policy, but most have detailed that they will be prepared to act and cut rates if the data does weaken.
Meanwhile, the migration of US assets from financial institutions and foreign central banks is likely to remain in play – while Trump may have ceded to the markets, foreign entities are not going to be taking profits on any gold positioning and the migration from a concentrated US asset base will likely continue as long as Trump’s policy agenda remains highly unpredictable.
In my view, while we want to be watching the level of daily inflows/outflows to gold ETFs (notably the GLD ETF), and the monthly reserve data from China, the gold price will be highly sensitive to the incoming US economic data. Market participants will react to the outcome of the S&P Global PMI’s, weekly jobless claims, Q1 GDP, JOLTS report, consumer confidence and the non-farm payrolls (due on 2 May) to refine its probability of recession risk.
Expectations are building for a weak NFP print which could put renewed downside pressure on the USD, and lift gold, with expectations then rising that the Fed will cut rates in the June meeting. Conversely, a strong NFP print or a trend towards better-than-feared US data could trigger a sell-off in gold, as rising US bond yields draw capital back into yield-bearing assets and strengthen the dollar.
*Ahmad Assiri Research Strategist at Pepperstone
