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Investors buying gold as a hedge against potential stock market fall?

There will be stronger buying if gold sustains above the Fibonacci level at $1526.40, while $1512.640 will be the support level

January 06, 2020 / 11:45 AM IST

Gaurav Garg

Gold prices closed higher in the last few trading sessions after hitting its highest level since November. According to market sentiment, gold prices are being driven higher by a weaker US Dollar, as investors are likely to liquidate their bullion hedge positions in the currency.

Another factor is the uncertainty over the US–China trade deal as investors are seeking more details about the plan. There are a few who have doubts about the rally, and are assuming that the rise might be due to the end of the year position-squaring. February's Comex Gold has settled at $1518.10, up 0.24 in last week.

The biggest contributor to a price surge in gold is a low volume of trading  due to positive comments from Washington and Beijing on a trade deal and strong demand for risky assets. There is no argument that has been raised by either country with regard to the trade deal so far.

Additionally, the global economic environment is boosting equities. Most of the world markets are near all-time peak levels. On Friday, it was announced that profits at industrial firms in China for November grew at the fastest pace in eight months, breaking their three-month losing streak  as production and sales quickened.


Gold has recently delivered its best weekly move in more than four months. However, the market was not too elated by the performance since it happened during a holiday-shortened, and low volume week. This negative view was supported by global economic growth concerns and US-China trade deal uncertainty.

The primary trend seems to be bullish, according to the daily charts. This trend continued in the last few trading sessions as well, when buyers took out the previous sessions high. There appears to be no sign of a trend reversal anytime soon, but there is room for a correction of about 30-50 percent.

The main trading range appears to have formed between $1571.70 (High on September 4) and $1453.10 (Low on November 12). The commodity’s retracement zone, which is currently between $1512.40 to $1526.40, is being tested in the recent times.

Thus, all descends on the investor’s response to the retracement zone between $1512.40 and 1526.40. Trading in this zone would suggest a neutral to upside bias. There will be stronger buying if it will sustain above the Fibonacci level at $1526.40, while $1512.640 will be the support level that is to be kept in mind.

When gold and stocks rally at the same time, most of the investors choose one asset over another. In this case, perhaps investors are buying gold as a hedge against potential stock market fall.

The Author is Head of Research at CapitalVia Global Research Limited- Investment Advisor.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Jan 6, 2020 11:43 am

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