After reaching a high at $1349.80 on February 20, the nearby gold futures contract came tumbling down. Gold had been on a corrective journey and heading for the first level of technical support at its January 24 low at $1281.50 per ounce.
Gold fell last summer, and in mid-August, it traded to the lowest price since early 2017 at $1161.40 on the nearby contract. However, the market volatility over the final three months of 2018 lifted the price of the yellow metal to the February peak that gave way to another test on the downside.
As the daily chart highlights, the price of gold fell just below its technical support level at $1281.50 when it reached $1280.80 on March 7. The very next day, gold was off to the races on the upside once again with the price probing above the $1300 level and settling on March 8 at $1299.30 per ounce. On March 11, gold pulled back, but it remained above the $1290 level.
Both price momentum and relative strength indicators fell into oversold conditions during the recent correction in the gold market. At the same time, the total number of open long and short positions in the futures market declined from 510,553 on February 20 to 468,335 on March 4, a drop of 8.3% as it is likely many market participants holding long positions in the yellow metal scrambled for the exits as the price moved to the downside. In futures markets, declining price alongside a drop in open interest is not typically a technical validation of an emerging bearish trend.
Gold may have found a low on March 7, and by the end of last week, it was testing the $1300 level once again. Meanwhile, the open interest metric rose with the price of the precious metals reaching 513,795 contracts at the end of last week. The rise in price and open interest tends to be a validation of the price recovery in a futures market, from a technical perspective.
Last week, after rallying since the end of February, the S&P 500 put in a bearish reversal on the weekly chart. The last time we witnessed the same pattern was in early October 2018 which led to an over 20% decline in the index. A return of volatility to the stock market could create an environment where market participants will once again go for the gold as a safe haven investment vehicle. In a sign that gold could shine again over the coming weeks, the dollar index is not far off its December 2018 peak, but gold ignored the greenback as investors and traders flocked to the market late last week as turbulence returned to the equity arena.
On Monday, March 11, gold was around the $1290 level, and the stock market recovered as the market appears to be waiting for the next shoe to drop. The stock market could be sending signals that it has run out of upside fuel. The trade negotiations between the US and Chinese are ongoing, and there is no agreement for a smooth and final Brexit with the deadline on March 29. Gold thrives during uncertain times, and the yellow metal is telling us that fear and instability may be making a return to markets across all asset classes sooner rather than later.