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Traders turn away from gold, in favor of USD backed securities
14.07.2022

Gold is the world’s oldest safe haven asset which has managed to maintain its “safe haven” status. Many economists, as well as central bankers, are advising that there is a high risk of recession and that the stock market is performing poorly. Not to mention, the Ukrainian-Russian conflict which continues. So many investors may be asking why the number one safe haven asset is declining?

The value of gold is known to be correlated with many elements such as interest rates, investor sentiment, and bank reserves. However, one of the main links is with the US Dollar as they are known to have an inversely correlated relationship. An inverse correlation means that when one asset increases, the other declines. This is why the USD has been seen gaining significantly over the past few months.

When looking at the price movement of XAU/USD, we can see that the price movement is declining within an Elliot Wave style trend, forming lower lows and lower highs. The price has started to decline once again, attempting to form a lower low., as we edge towards the next US trading session. Today the price has declined by 1.43% so far, but it should also be noted that the asset has been declining for five consecutive weeks. The total decline over the past five weeks measures 8.96%.

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The three most liquid assets in the global economy are the USD, Oil, and Gold. Of the three, Oil and Gold are the only assets that do not pay interest. When one of them rises sharply, the other two normally tend to fall and/or witness pressure. This is what has been happening over the past few months. Even though Gold is considered a significant safe haven, investors with low-risk appetites have opted for US Dollar backed securities so far. However, as the price significantly declines, investors will be monitoring whether they can benefit from the discounted price.

Primary signs of this process can be seen in the latest data from a weekly report published by the Commodity Futures Trading Commission (CFTC). According to its recent report, there is a clear dominance of contracts in favor of sellers, which doesn’t come as a surprise when looking at the price movements. For example, according to the report, swap dealers had 217,444.000 Sell positions against 90,707.000 Buy positions. At the same time, the weekly figures suggest that the ‘bears’ are starting to actively get rid of their contracts and gradually turning into ‘bulls’: For example, over the past week, the number of Sell positions has decreased by 15.748.000, while the Buy positions increased by 1,849.000. However, we cannot be certain whether this cause of action will continue in the longer run.

In the meantime, the market will continue to monitor the price movements in an attempt to keep trades in line with the current price action. Influential factors will mainly be economic reports due to be released over the coming days and comments from the Federal Reserve.

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