Who and why beat gold on Friday?

If you look at the daylight candle on gold that formed on Friday, you get the feeling that we are faced with something incredible. In general, the situation is really extremely atypical both in terms of the size of the movement and in terms of the fundamental background (fear and panic are usually allies of gold and not its enemies) that has developed today. Therefore, it makes sense to try to understand what is happening.

To begin with, nothing really incredible happened. There have been tougher landings in the history of gold. For example, on April 15, 2015, gold at the end of the day lost almost $140 in value. Against this background, Friday's loss of $60 seems almost an event. Although, of course, the event was very atypical and extraordinary.

So, historical experience says that the situation, although very rare, is possible.

A question arises, why did it arise? It would seem that the Fear Index (VIX) for the week has grown almost 3 times. Panic has hit financial markets. Investors naturally run away from risky assets (over the week, US stock market capitalization fell by more than 10%, which is almost unprecedented), which creates ideal conditions for gold growth. And gold loses $60 per day.

Let's try to highlight the key reasons for what is happening.

Factor number 1. Money. Investors who, for one reason or another, are in long positions in the stock markets, need money to maintain them. In addition, there are quite a few investors who are trying to buy cheaper (we will not talk today about whether the stock markets have bottomed out, we simply state the fact that stock prices have fallen sharply, which in itself cannot but arouse the interest of a number of investors). To do this, they need money.

There is an old saying on Wall Street: "in bad times you sell not what you want, but what you can." That is, on Friday, investors sold gold because they needed money. They did not sell it because they wanted to, but because it was necessary. This is a very important point from the perspective of understanding the future dynamics of gold prices.

Factor number 2. Concerns about the demand for gold. Oil has already lost over 30% on fears that asset demand will decline sharply in 2020. In this regard, one can draw a parallel with the gold market. The main consumers of physical gold in the world of China and India.

Accordingly, the problems of China and its demand are problems of the gold market as a whole. The events of last week showed that everything is starting to develop according to a bad scenario. Accordingly, the problems of the global economy cannot be avoided, which means that physical demand in the gold market is under threat.

Factor number 3. Central banks are likely to be forced to respond to the epidemic and its consequences. The most obvious option is to lower rates. Lower rates can trigger inflation. And inflation is perhaps the most important enemy of gold.

Factor number 4. The triggering of stops. As a rule, behind every really strong movement in the financial markets are purely technical issues: triggering of stops and margin calls. It is likely that the first three factors would be enough to reduce the price of gold in the region of 1600 and slightly lower. But just below 1600, most likely there were large arrays of stops, the triggering of which provoked an additional downward impulse. Judging by the dynamics of gold prices, a number of stops were still around 1590 and 1580. Which ultimately led to lows at the bottom of 1560. After all, how does the mechanism for triggering stops work? For example, triggering a stop at a long position in gold means closing it. And what does it mean to close a long position? In fact, you need to turn +1 into 0. And for this you need to open -1, that is, a short position. So it turns out that at some point in time, traders begin to open short positions en masse, which gives an additional impetus to the movement.

As you can see, a logical explanation of what is happening can be found. The question naturally arises, what to do with gold? Buy it because it has fallen in price or sell because see the factors above?

Our position in the current realities has not changed due to Friday distribution. Definitely a buy. Panic is in full swing. Investors run not only in US treasury bonds but also in other safe-haven assets (see the dynamics of the Japanese yen on the same Friday). Nobody canceled the status of gold as a safe haven. So far, the problems of the world economy have only been exacerbated, so that a drop in demand, neither physical gold should be more than compensated by the growth in demand for gold as an asset-refuge. Author of the best indicators for traders and analysts.