Market News & Analysis

Top Story

Why gold has underperformed this week

In an article written last week after USDJPYs five standard deviation move, I talked about the break down of one of the most established relationships in trading as both gold and USDJPY hit the afterburners to race higher in tandem. More broadly we could also have made note of the break in the correlation between USDJPY and U.S. yields as well as the break in the correlation between USDJPY and U.S. equities.

We listed the reasons behind this as being partly due to consistent selling of JPY by Japanese trust accounts, a break of a significant technical level in USDJPY (110.30) and a function of positioning with both longer and short term accounts long JPY. The positioning factor is a reason that helps explains why gold has not done as well as might have been expected over the past 24 hours.

As can be viewed on the chart below, the last update from on the Commitment of Trader (COT) data shows speculative accounts increased gold longs to record levels in February in response to Covid-19 and falling interest rates. When positioning becomes too crowded in markets it is a warning that the market is overbought and prone to a correction.

A second reason why gold may have underperformed over the past 24 hours is after this week’s sharp fall in equities, some funds are likely to have suffered losses on their equity books. As such, they may have moved to take profit on their winning trades e.g. long gold and silver to pay for their losses elsewhere.

There is an additional aspect to this whereby funds traders have firm limits in place as measured by Value at Risk (VAR). Put simply VAR rises when volatility rises and if funds are already close to their VAR limit, they will need to cut positions to offset a sudden rise in volatility like we have seen this week.

This can lead to the type of de-risking or position wash that occurred in gold over the past 24 hours and for the patient trader, an opportunity to buy gold at better levels.

Why gold has underperformed this week

Source Tradingview. The figures stated areas of the 26th of February 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.