Trader’s ignore long-term fundamental issues and take gold lower

Today gold sustained the largest single day drawdown since market participants bid gold prices above $1800 on a closing basis on Tuesday, July 7. As of 5 PM EDT gold futures bases the most active August contract is currently trading off by $17.50
(-0.96%), and fixed at $1796.40. The August contract traded to an intraday high today of $1816.20, and an intraday low of $1794.10. Obviously gold futures closed just a few dollars above today’s low.

Spot gold is now trading a few cents above the most active August futures contract. Currently fixed at $1796.85, which is a net decline of just over $11, or 6/10 of a percent for the day. In approximately two weeks the August futures contract will become spot pricing and the next most active contract month will the October contract. Although spot gold also closed under pressure, trading approximately 1% lower (-$18.00), the premium of October gold is above spot pricing is approximately $11. Currently October 2020 gold futures are fixed at $1808.10.

With the exception of palladium, the entire precious metals complex has traded lower. Palladium gained almost 4/10 of a percent, which is a gain of $7.90, taking the most active contract to $2017.90. Silver which has been shining so brightly recently sustained the largest percentage drawdown giving up 1.24% in trading today. The most active September contract of silver is currently fixed at $19.51 ½ cents.

Today’s $17 decline in gold futures resulted in the first instance since June 6 when pricing effectively traded and closed below the lower level support trendline which was created by following a series of lows beginning with the low of $1671 which occurred on June 5. Although Tuesday’s trading activity took pricing firmly below that support trendline, by the close of trading in New York pricing had come well off of the lows and traded back above $1800 per ounce.

The question is whether or not today selloff is an indication that a correction has begun, or if this round of short-term profit taking is simply a one and done. While we acknowledge that at any point traders can move gold pricing lower, the fundamental fabric behind the recent run-up remains absolutely and fully intact. The massive expenditures by global central banks and the aid packages funded by their treasuries worldwide had swelled their budget deficits to unprecedented amounts.

It was recently reported that the U.S. budget deficit for June is at a record high of $864 billion, taking the U.S. national debt to a record $27 trillion. According to the Committee for a Responsible Federal Budget, “The national debt is currently higher than at any time in history outside of World War II and the years immediately after, and it is rising unsustainably. Moreover, recent tax and spending legislation have made a bad situation even worse.”

Most alarming were their projections which indicated that the trillion dollar deficit will return permanently by next year and debt will exceed the size of the economy (GDP) within a decade. Their study concluded that, “The complete disregard for budgetary constraints that lawmakers have shown in the past year – and in the past few years before that as well – have largely undone the progress made on deficits earlier in the decade. As a result, an aggressive combination of spending reductions, revenue increases, and entitlement reform will be needed. Hopefully, lawmakers will quickly re-focus on deficit reduction to prevent debt from reaching unprecedented levels.”

While the projections allow for dramatic changes through budgetary constraints, the likelihood that lawmakers will focus on the deficit reduction rather than their own agenda seems remote. For that reason, I remain guardedly optimistic and realistically extremely concerned.

Wishing you as always good trading and good health,