The gold market is sharply lower at lunchtime Monday as fears over Covid take hold. Both gold and silver are lower today, hitting two-month lows in the process. The selling was not limited to precious metals, today, and the entire raw commodity sector was hit hard over demand worries as Covid again spreads through China. The world’s second-largest economy is enforcing lockdowns in numerous areas including Shanghai and requiring testing of its people. With lockdowns having now spread to Beijing, there are increasing concerns they will have a very negative impact on global demand. The issues in China are expected to drive already-high inflation even higher and to put further strain on already-strained supply chains globally.
Worries over the Covid situation in China led to Chinese stocks being hammered yesterday for their worst decline in two years. The Chinese currency, the yuan, declined to its lowest level against the dollar since late 2020. The carnage may not yet be over, either, as the virus could easily continue to spread in China, possibly forcing even more closures.
The situation in China is a major factor for markets currently along with the ongoing war in Ukraine. The war still shows no signs of de-escalating. Traders today, however, appear to be more focused on China and Covid than the war. The threat of major supply chain glitches and lowered overall demand is fueling a sell-off in gold and other metals today. Despite stocks being sharply lower today as well, metals are not seeing any significant safe haven buying on Monday.
The lock of buying today and the storing selling pressure have broken the gold market on some levels. Spot prices have broken two support levels on the downside, $1950 and then $1900. The breakdown of prices could attract further sellers in the days ahead and gold could potentially have a long week. The market, while below $1900, is not far below and the bulls could attempt to recover some ground quickly. A rapid rise back above $1900 could attract further buying as bargain hunters look to get long.
The sell-off today has erased the bulls’ advantage on the daily chart. The next several sessions may provide clues about the market’s intentions going forward. The bulls will look to retake the $1900 level and then the $1950 level. The bears will look to produce a close below support at the $1850 area. Until these areas are breached, either above or below, the market could spend some time moving sideways. Of course, given the current geopolitical and economic scenarios, the smart money may be more apt to buy and get long than to sell and get short.
The next FOMC meeting is just a few weeks away. That meeting could provide serious clues about the central bank’s intentions going forward. The Fed may hike rates by 50-basis points in May rather than 25 and could do so in the next couple of meetings to try to get inflation under control.