Gold lost more than 2% on Monday and posted its largest one-day drop since March. The yellow metal could suffer a substantial drop fueled by a hawkish Federal Reserve, economists at TD Securities report.
XAUUSD trades below the bull-market defining uptrend
“The composition of gold markets has changed in the aftermath of the pandemic, leaving proprietary traders as the dominant speculative force. This cohort holds a massive amount of complacent length in gold, acquired during the pandemic. Under the weight of a hawkish Fed, these positions are incredibly vulnerable and pose a risk for a substantial correction in gold as a result. With XAUUSD now trading below their bull-market defining uptrend, a technical breakdown could be the catalyst needed to squeeze this cohort.”
“Prices have broken below the threshold for CTA liquidations, which we expect will result in substantial selling flow from systematic trend followers.”
“The growing valuation gap between gold and real rates might eventually exacerbate the repricing lower in the yellow metal, despite it being attributed to both an undue rise in real rates given quantitative tightening, and to the still-massive complacent length in the yellow metal which has kept the prices elevated.”