Sudden glow of gold in a falling market

The Dow Jones index experienced its worst drop in 10 months on Monday, dropping 600 points or 1.8%. The S & P500 Index lost about the same amount, 1.7%. The dollar index hit monthly highs, trading above 93.0.

Intraday, the S & P500 had fallen more than 5% from early September highs at one point, interrupting a 10-month streak of gains when the index did not experience such pullbacks.

Nevertheless, it can hardly be said that the markets have plunged into fear. The currency, debt and precious metals markets showed sudden resilience, if not indifference, during yesterday’s stock market sell-off.

The debt and currency markets are seen as the ‘smartest’ and deepest, so their detachment from yesterday’s liquidation should be seen as an important signal. It wouldn’t be surprising if later in the day we saw an increase in share purchases of strong companies after the recent downturn.

Even more remarkable was the purchase of gold stocks and gold mines. The sector’s long slump was interrupted yesterday by a jump of around 3% in the biggest gold stocks. Gold prices rose 0.5%, gaining support shortly after falling below $ 1,750.

As the previous months have shown, rock-solid gold price support is near the $ 1,700 level. But it looks like active buyers have settled into the $ 1,750 zone.

Gold’s ability to resist the general downtrend is a testament to investor confidence that global central bank policies will remain flexible enough to avoid triggering a global downward asset selling spiral.

Of course, volatility risks need to be kept in mind ahead of Wednesday’s Fed meeting. The outcome of the meeting and the comments have, in theory, the potential to break or strengthen any trend (both long term bullish and short term bearish). In practice, however, the FOMC comes with a very simplified formulation that does not cause a strong negative reaction.

Nonetheless, cautious gold bulls should remain focused on the $ 1,800 area, which, if broken, would signal the breaking of the bearish correction. In the event that the stock market liquidation escalates further, the focus should be on around $ 1,700-1750. A break below that would signal recent buyer’s bid and promise to trigger a deeper correction with near-term targets at $ 1,500.


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