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Gold: Investors on edge, speculators ready to bid on mixed geopolitical sentiment

  • Gold prices back below pre-US-drone-strike levels, although speculators looking for opportunity. 
  • US data in focus which is underpinning the bearish potential in gold prices. 
  • There is a current investigation to the Ukraine aeroplane for which US officials are confident Iran shot down.

 The price of gold is on the back foot on Thursday, bleeding additional dollars following the speculative sell-out on the back of the de-escalation in the Persian Gulf conflict surrounding a series of US and Iran's tit-for-tat retaliation strikes.

The speculative bid was squeezed out sharply from the post-US drone strike highs of $1,611 (a fresh yearly high) when markets got the hint from Iran, that should the US hold fire, there would be no further attacks. 

The price of gold eventually plummeted after Wednesday's US President Donald Trump’s address to the nation which was well balanced between, we don't want war, nor does Iran, but we will sanction Iran for misbehaving.  

Subsequently, prices are back to levels traded prior to the killing of the Iranian general which occurred last week. With geopolitics in the rear-view, the immediate focus will turn to position, which rests at extreme levels. 

"It is worth reiterating that gold bulls have virtually no dry-powder left, with both an extreme number of traders long and a larger-than-expected position held on a per-trader basis,"

– analysts at TD Securities argued. 

While TD Securities continues to believe that gold's bull market is still young in nature, a near-term drawdown still appears likely as the geopolitical news flow triggers extreme positioning to normalize. "That being said, we do not expect much flow from trend-following algorithmic traders."

Mixed messages out there, risk-off flows on standby

However, markets will remain on red alert for some time to come over the Iran/US stand-off. There are mixed messages out there. A senior Iranian military commander vowed there would be "harsher revenge".

Additionally, US officials are confident Iran shot down a Ukrainian jetliner which killed all 176  passengers (including some 60 Canadians) in the hours after the Iranian missile attack which is under investigation. A source who was in the briefing said it appears missile components were found near the crash site, Van Cleave reports. Trump has said, that this could have been a mistake, but nonetheless, markets are keeping an eye on the investigation and weighing the implications. 

"I have my suspicions... it is a tragic thing...someone could have made a mistake on the other side...it was flying in a pretty rough neighbourhood,"

– Donald Trump said to reporters when asked about the plane incident.

The Ukrainians suspect either a terrorist attack of a missile, but said that there will b an international investigation – the truth will be revealed in due course and markets are on standby.  

Furthermore, Amir Ali Hajizadeh, who is the head of the Revolutionary Guard's Aerospace Force, also said the attacks on the US base, in which no one was killed, marked the beginning of a string of attacks across the region, Iranian state television reported, according to Reuters. 

Financial Times highlights risk variables

Yesterday, The Financial Times (FT) highlighted some ongoing troublesome variables which are worth taking note of. "Yet even if outright war has been avoided, the road ahead remains hazardous," The FT argues. 

The article, which was written overnight, warns that Iran’s response to the US attack underlines its capacity for careful calculation: Iran’s response to the US attack underlines its capacity for careful calculation - FT

US data underpinning USD strength and gold's downside prospects

All in all, we are not out of the woods yet on the geopolitical front and there is potential for further spikes of risk-off in a flight to safety. However, the economic fundamentals may make for short-lived upside rallies as speculators could be quick to take profits.

Earlier this week, the US dollar was in view and bid following a report that was showing US private payrolls increased by the most in eight months in December. The data comes ahead of the highly anticipated Nonfarm Payrolls on Friday. However, what should be noted, is that the job gains last month were likely flattered by a seasonal quirk, according to Reuters.

Nevertheless, the data were solid and if they can be regarded as a prelude to tomorrow's report, we could be in for a wild upside ride in the greenback. The ADP National Employment Report on Wednesday showed private payrolls jumped by 202,000 jobs last month, the largest gain since April, after an upwardly revised 124,000 rise in November. Private job growth averaged 163,000 jobs per month in 2019, slowing from an average increase of 219,000 in 2018.

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