Gold’s Drop May Have Been Caused More by Technical Factors than by Friday’s U.S. Job Report and the Fed

First of all, before evaluating the recent abrupt selloff in precious metals, we need to draw parallels with recent misperformance of the cryptos raising eyebrows of so many of us. There is strong reason to believe both of these events have many things in common. As Bitcoin, Ether and their smaller peers soared over the past weekend causing a huge inflow of antiinflationary high-risk investments, gold certainly lost some luster. It happened even without further events that only amplified precious metals’ deterioration. The bitter pill is that earlier this summer, gold topped $1,900/oz. with talk that the metal's fundamentals have never been better.

On Monday Comex gold futures settled with their worst daily drop since mid-June and their sharpest weekly drop in two months. Likewise, December Comex gold (XAUUSD) declined -1.7% to stand at $1,732/oz., its lowest since April, after earlier touching a session low $1,672.80, following Friday's 2.5% rout that capped the metal's steepest weekly decline since mid-June. As of Tuesday afternoon, gold is trading at around $1,730/oz. Meanwhile, September silver (XAGUSD) shed 3.2% to $23.54/oz., after sinking to an 8-month low of $22.50/oz, and now trading at $23,40/oz.

The spillover was gargantuan. Among the most impacted gold and silver mining stocks: Kingross gold (KGC -2.3%), Yamana Gold (AUY -3.6%), Eldorado Gold (EGO -3.4%), Iamgold (IAG -4.2%), New Gold (NGD -5.7%), Kirkland Lake Gold (KL -2.9%), Wheaton Precious Metals (WPM -2.8%), Gold Fields Limited (GFI -2%), Harmony Gold Mining company (HMY -3.6%), First Majestic Silver Corp (AG -3.8%), Endeavour Silver Corp (EXK -5%), Fortuna Silver Mines (FSM -3.8%), Coeur Mining (CDE -3.8%), Sandstorm Gold (SAND -3.9%) and some other names. AngloGold Ashanti (AU -15.0%) plummeted to a 52-week low after cutting production guidance.

The SPDR Gold Trust ETF (GLD), the sector's heavyweight, with more than $59 billion AUM, lost 2.26% and close to 5.33% YTD. Another frequently mentioned ETF that tracks gold's spot price, iShares Gold Trust ETF (IAU), which has fallen 2.33% on the day and is 5.27% YTD, followed by Aberdeen Standard Physical Gold Shares ETF (SGOL) which dropped 2.15% and 5.25% YTD.

The most apparent trigger event was Friday’s U.S. jobs report, which showed the U.S. economy added 943K jobs in July – roughly 100K more than consensus forecast and adding the most in nearly a year - jolted the U.S. dollar and bond yields, thereby hurting demand for precious metals. The U.S. unemployment rate also declined to a lower than forecast 5.4%. However, there is no evidence that event was the single most important factor to consider, since, as we know, cryptos not only continued their ascensions but greatly increased their momentum.

What was interesting is that the news caused the benchmark 10-year Treasury yield to skyrocket to 1.30% from 1.21% on Friday. So, basically, the ill-mentioned job report was only an accompanying factor that spoke in favor of the growing anticipation that the Fed's taper date could be brought forward with an announcement in September and the actual tapering in early January looked somewhat more likely than before.

All in all, gold and other precious metals were affected by the following considerations:

• Strong U.S. Nonfarm Payrolls jobs report on Friday.
• Uneven recovery story for commodities (remember the mid-week’s sudden plunge of oil, despite overall positive tone brought by a recent OPEC+ meeting), with heavy selling in Asian early morning trading.
• Apparently rising Delta Covid cases and tighter monetary conditions.
• A sharp rise in inflation-adjusted and long-dated Treasury yields.
• Investors’ growing self-persuasion in the Fed’s better positioning to become more hawkish.
• Expected today’s inflation data, that only added to importance following footsteps of the recent slew of various job and unemployment reports thereby fortifying the emerging risk-off tone in the market.

But above all, it’s important to realize the existence of mutual influence between the crypto and the precious markets – simply because they accommodate so many co-thinkers being stretched between these unlikely inflationary protective options.