Today’s sharp decline in gold leaves many traders, Dazed and Confused

“Been dazed and confused for so long, it's not true … Lotsa people talkin', few of them know” - Led Zeppelin, Songwriters: Page, James, Patrick.

Many traders and market participants are quite frankly bewildered at the extent of today’s selloff in all the precious metals. You could even say that it is left many gold investors dazed and confused. Market commentators and analysts cited today’s dramatic $66 price drop in gold as a result of U.S. government bonds extending their yields. The belief is that higher potential return from bond yields could be a rational reason for traders to move allocated capital that was positioned in gold into a safer asset class; U.S. government bonds, even though the higher yields are dismal in comparison to past returns.

As of 4:46 PM EST gold futures basis the most active February 2021, Comex contract is currently fixed at $1846.40 after factoring in today’s deep decline of $67.10, resulting in a decline of 3.51%. The damage was not only contained to gold, silver was battered in a 12-round heavyweight bout that ended in a KO. The belt holder in the precious metal division, the white metal lost today’s title fight giving up the championship as well 6.66%, a total of $1.81. Currently, the most active March 2021 Comex contract is fixed at $25.46. Both precious metals had a fractional percentage of today’s drawdown directly related to dollar strength. Currently, the U.S. dollar is fixed at 90.050 which is a net increase of 3/10 of a percent, a mere fraction of today’s dramatic selloff.

This can be illustrated indicate KGX (Kitco Gold Index) when looking at spot gold and silver pricing. Spot gold is currently at $1846.80 after factoring in today’s decline of $67. Noteworthy is that only $4.80 of the decline can be attributed to dollar strength. Spot silver is currently fixed at $25.33, after today’s decline of $1.78, and just as in the case of gold only $0.07 can be attributed to the U.S. dollar getting stronger.

Lastly, there has been a growing bullish market sentiment about equities and great interest in bitcoin that could have added to the selling pressure. However, all of these factors collectively do not rationally explain the depth of today’s price decline. This is why today’s title reflects the overall bewilderment to the cause-and-effect relationship that took the precious metals so dramatically lower.

The rationale behind the title of today’s article “dazed and confused” goes deeper than the rationale cited to explain today’s decline. You merely have to look a few weeks out into the future specifically January 20, when President-elect Joe Biden will become the 46^th United States president.

According to Reuters, “U.S. President-elect Joe Biden said his administration’s economic package will be in the trillions of dollars and include unemployment insurance and rent forbearance. It is necessary to spend the money now,” Biden told reporters. “The answer is yes, it will be in the trillions of dollars, an entire package.”

Bloomberg TV reported that President-elect Biden announced that the price of the stimulus plan will be high. In a statement, he said that there is a “dire” need to act immediately. The exact amount of his economic stimulus package and how the aid is allocated will be announced in a detailed economic package on Thursday.

Then there is the sad truth that the current pandemic is entering a new wave with a much higher infection rate than ever before. CNN today reported that “The US reported more Covid-19 cases and deaths in the last week than any previous seven days during the pandemic, data showed Friday morning. And more than 4,080 US coronavirus deaths were reported on Thursday alone -- the most ever reported in a single day during the pandemic and the first time the daily tally rose above 4,000, according to Johns Hopkins University.

In Los Angeles county it was reported that some ambulance crews have waited hours for their patients outside hospitals because the facilities are overwhelmed with one person dying of Covid-19 on an average of every eight minutes. Texas reported high Covid-19 hospitalization’s statewide for the fifth day in a row Thursday. But more alarming is the fact that Dallas County which is the second-largest county in Texas had only 13 adult ICU beds available on Wednesday. With the United States averaging about 228,400 new infections of the coronavirus daily over the last week, the disheartening news is that currently, recent infections are at an all-time high 3.4 times the infection rate that occurred in the summertime peak.

This week will be yet another period detailed in history books. The actions of a minority of “so-called protesters” although armed militia might be a much better description of the individuals that stormed both the House and Senate this week. The global pandemic has had optimistic news that a vaccine has been created however new mutations bring into question if the efficacy rate will be as high as for the original virus the vaccine was created for. The tremendous spike in new daily cases necessitates a much greater expenditure of capital from the government. This is also created a new level of economic contraction and job loss and collectively these issues will haunt us for at least the first two quarters of 2021.

After a week such as this, the only statement that makes any real sense is that the majority of individuals who have been watching and absorbing the events of this week must be absolutely “dazed and confused”.

Wishing you as always, good trading and good health,