You probably don’t need me to tell you that gold’s taking it on the chin today. The important question is: what comes next?
I always tell readers I have no crystal ball—and that they should run from anyone who tells them they do. But that doesn’t mean we have no information on what’s going on. We can consider the possibilities… and the odds.
With gold already having broken below several psychologically important support levels, it could drop substantially lower. We could be looking at $1,250 gold tomorrow.
On the other hand, gold appears to have sold off for the wrong reasons. It did not drop when the Fed raised interest rates this week, as many expected. In fact, it rose that day. Today, the US slapped $50 billion in new tariffs on China, and broader markets around the world are selling off. This kind of volatility should be good for the price of gold, but gold is off sharply.
What’s going on?
Looks like a liquidity squeeze to me.
When “everything” gets whacked, people sell what they can to cover their margin calls. Gold is one of those highly liquid assets that can always be called upon in such times.
This happened in a bigger way during the major “waterfall events” of 2008. People sold gold because they couldn’t get a decent bid on anything else. They rushed back into it as soon as the acute liquidity crunch passed—and gold went on to new highs.
Markets are made of many people, each with his or her own reasons for buying and selling. That makes it inaccurate to give one single reason for any market movement. But I just can’t see people all around the world reacting to increased market volatility by deciding to dump safe-haven assets.
If I’m right, the gold selloff is overdone and likely to reverse soon.
That doesn’t mean, of course, that gold can’t go lower first.
Personally, I’m not planning to try to catch a falling knife. But when gold starts recovering, related equities will likely still be on sale.
I see that as a great buying opportunity in the making.
