Gold prices were weakening again at the time of writing, falling alongside stocks, bonds and the Japanese yen. The risk-off tone across financial markets seems to have resumed following last week’s volatility. The culprit? It seems like concerns over Japanese debt is unnerving investors today. The resulting rally in bond yields and the dollar are also adding pressure to the gold forecast.
Analysis: Japanese debt concerns trigger carry trade unwind
Concerns over Japanese debt levels are mounting. You can’t have your cake and eat it too. Well, that’s what the Japanese government is trying. They are reportedly preparing a large fiscal stimulus package worth 17 trillion yen, while being against the idea of monetary policy normalisation by the Bank of Japan. The result is a slumping yen and bond prices, sending Japanese yields surging higher. Markets fear the government is mismanaging the economy and are therefore demanding a higher yield for holding Japanese debt, what they perceive as being riskier than before.
Why is this important for gold and stocks you might be wondering? Well the moves in Japanese assets have potentially ignited a so-called carry trade unwind, reminiscent to the summer of 2024. The carry trade is where you borrow money from a country with interest rates low, and you use the funds to buy stocks and other financial assets like gold and crypto in other currencies like the dollar. With Japanese yields now surging, the cost of the carry is increasing. Yields are starting to get uncomfortably high, and this is increasing the pressure on leveraged bets, causing traders to unwind their trades in all sorts of financial assets, including gold.
Meanwhile, rising yields in and of themselves are not good for low- and zero-yielding assets like gold and silver. The yen funded carry trade unwind is therefore a negative influence on the gold forecast.
Gold forecast: What about XAU’s haven appeal?
While in theory anything that impacts risk appetite should boost the appeal of haven assets like gold, we have seen on numerous occasions that things don’t always work like that. Gold has increasingly become a speculative asset than a haven commodity: after all, it has been trending positively with the S&P 500 for a number of years now. This makes it vulnerable to a risk sell-off. Meanwhile, if margin calls are triggered because of a stock market drop, traders will be forced to sell their profitable holdings to free up margin, which could include, among other things, larger bullish gold trades.
If the Japan-related sell off gathers momentum, I don’t think gold will be able to buck the trend, at least in the near term anyway. Lots of speculative long exposure in gold which will face the same pressure as stocks.
Meanwhile some of the significant drivers of gold are no longer there. One reason behind the late buying was the prolonged US government shutdown. The re-opening of Washington should therefore be a negative influence on haven assets like gold. On top of this you have the US-China trade truce being extended. This should, in theory, have dampened safe-haven appeal.
Friday’s drop initially looked like the moment gold would finally buckle, yet key levels held, and the weekly picture remained intact. That leaves traders questioning whether real downside pressure is finally building, or whether gold is preparing for another push higher.
Technical outlook and key levels to watch
Technically, the chart of gold has turned a little mixed-to-bearish following the bearish price action at the back end of last week. The sharp reaction from the $4,200–$4,250 area on Friday—a former support zone turned resistance—reinforced the importance of this region. It was here that prices broke down during the 21 October reversal, which has framed our view of a potential temporary top.
This week’s price action should help clarify whether that correction is still unfolding. Continued softness would open the door towards $4,000, with $3,930 the next meaningful support. A break beneath that level would signal a more decisive turn lower and weigh heavily on the broader gold forecast.
On the other hand, if buyers regroup, initial resistance lies at $4,100 and then $4,145. A break through these areas could see gold re-test the $4,200–$4,250 band.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
