When markets are volatile, all correlations and safety bets disappear, and cash becomes the dominant currency. Investors and traders are questioning whether this is the case in today’s markets, given that everything is in decline, including the precious metals expected to serve as the ultimate safe haven. The question now is whether the current meltdown will worsen, and if so, how much worse it will get before things start to improve again.
Background
If one looks at the markets, there is only one dominant color in front of you, and that is red. Equity markets in the US are free fall, as the Nasdaq index’s futures have traded over 6% down most of the morning and have already entered correction territory. The precious metal actually recorded solid gains on Friday, but the selloff that is taking place is very close to wiping out all the gains that gold traders scored throughout last week. Gold has also broken important price levels, which many considered to be an important support level, and we will expand on this a bit later.
Why is the price of gold declining?
Generally speaking, traders and investors know one thing very clearly: blood is on the street. There is no better place to park your money than gold, as the shining metal has proven its track record over a long period of time. However, during market downturns, the majority of traders hold significant leverage positions. To protect their portfolios and meet minimum margin requirements, they are forced to sell some of their valuable assets, including gold. So, I firmly believe that the current sell-off in the gold price is mainly because traders are selling their position to cover their shorts in their portfolio or covering margin calls.
Can the sell-off become more intense?
Looking at this week’s selloff, there is certainly a possibility that the prices may go down a bit more before we actually see an improvement in the price action. If the question is how far the price can drop, it can easily drop another 10% from its current level, but it won’t alter the gold price’s long-term trend, which remains strongly skewed to the upside. The horizontal price line indicates the next significant support level in the price action, which is near the 2295 price mark, while the resistance holds at the high of the previous week.
Is the current selloff an opportunity?
The short answer is yes. The reason I am confident about the long-term price action is because the labor conditions in the US have deteriorated, placing significant pressure on the Fed to reduce interest rates. I believe that if the current selloff persists, the Fed will likely announce significant rate cuts in the coming days to calm the market. This would likely include a first rate cut of at least 50 basis points, with a high likelihood of a subsequent cut of the same magnitude. All of this will be highly positive for the gold price, which means we should see the dollar moving lower and the gold price moving sharply higher.
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