This article explains why GOLD (XAUUSD) fell victim to collateral damage and not to a fundamental shift in sentiment.
When there is a meltdown such as what happened over the four weeks in U.S. stocks, those managing funds have choices:
1) Reduce risk by exiting positions
2) Sell winners to cover losses elsewhere
3) Sell other positions to raise cash to cover margins.
Sometimes other positions being liquidated are ones that would normally not be sold off. Ilikenl it collateral damage.
How Gold became a victim of collateral damage
As can be seen by the following US500 chart, the re was a sharp fall in stocks. This, in turn, spilled over to the XAUUSD marker. Long positions were forced out when logic said GOLD should be getting safe haven flows.
In other words. XAUUSD long positions were a victim of collateral damage. It was a classic example of a liquidating market.
Once the dust settled it took several weeks before the XAUUSD market stabilized. Then after a period of consolidation, XAUUSD made a fresh push higher to trade to its long awaited 3000 target as shown on the following chart.
This is a good time repeat what I have noted about corrections.
- The breakdown to a 2832: low turned out to be just a correction.
- The selling was of a significant size that it took some time for the market to come back into balance.
- Once the liquidations were done and the correction ran out of steam out of steam. there were fewer longs left to absorb fresh buying (i.e. fewer longs to take profits and supply liquidity).
- As a result, it was more difficult to absorb fresh buying and the result was a new high, (vice versa can occur in a downtrend),
- In other words. A shakeout of weak long positions, was needed for XAUUSD to make a run to a new record high.
What I have just shown can be applied to any trend that reaches a point where it cannot make a fresh run at a new high (or low) without shaking out weak positions. In the case oif XAUUSD, the shakeout was the result of collateral damage.
ADDENDUM April 3, 2025
As this 4 hour chart shows, XAUUSD has fallen sharply from a new record high at 3167 earlier today (outside day).
Why?
XAUUSD may be a victim of selling winners to offset losses elsewhere or to build up cash to cover margins.
This is another example of what I call collateral damage.
Add comment
You must be logged in to post a comment.