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Gold and Bitcoin running hot as market senses turning point

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Gold prices surged as the market reacted to the escalating tensions in the Middle East. The end of the truce in the region could continue to fuel risk aversion and investors’ concerns.

As a result, the market broke above the 2050 dollars level on Friday. Gold is flirting with peaks observed during March 2022 and August 2020, at the height of the pandemic. The market could find support levels around the 2070-2075 dollar per ounce mark.

The escalation of fighting in Israel has helped extend gold’s uptrend of the last two months as traders also take into account changing expectations regarding monetary policy. Traders have been betting on an end to the interest rate hiking cycle and possible rate cuts in the first half of next year, which could continue to support gold’s rise over the medium term.

At last week’s Armchair Trader Beyond the Channel event in London, investors and speakers both confirmed a now widely held expectation that interest rates were at peak, and that central banks now have to consider when to begin cutting.

But some commentators think the gold bulls are getting over-optimistic.

“Outside Asian central banks and Western hedge funds, gold is far from a crowded trade right now,” said Adrian Ash, Director of Research at BullionVault. “Coin shops are glutted with customer selling, gold-backed ETFs continue to shrink, and BullionVault users sold 2.5 times as much gold as they bought as a group over the last seven days.”

Ash said this heavy profit taking among existing gold investors is being spurred by record-high gold prices, combined with the highest interest rates on cash since before the global financial crisis. While that’s also deterring new buyers for now, he also thinks gold’s underlying direction looks set to keep pointing higher in 2024 as a slower economy sees central banks start cutting interest rates and geopolitics continues to support bullion prices.

Gold traded to its new all-time high this morning at the start of Asian trading, following on from a strong close in the US at the end of last week. Today’s move appears to be technical in nature, considering the price action and some conversations with market participants.

It also appears some traders had been caught out by the move on Friday and were short gold and consequently bought the open in Asia. This triggered stop-loss buying from other traders including those short gold via options lifting gold to a new all-time high of about $2135/oz. Once this buying was completed, gold drifted lower.

The longer-term story, that of strong central bank gold buying, probably had nothing to do with this morning’s quick move.

“Short-term moves like this morning aside, by far the most important financial market drivers of gold will be the direction of the US dollar and the amount of cuts that traders price into the US interest rate market,” explained John Reade, a market strategist with the World Gold Council.

Bitcoin also surges over the weekend

Bitcoin (BTC) surged overnight to $42,000, reaching it’s all time high for this year. The increase followed a 9.5% increase last week when it closed at about $40,000, compared with the previous week’s closing value of $37,450. From Monday to Thursday last week, it maintained a stable price before a robust upward movement started on Friday, when it surpassed $38,600.

The Bitcoin price trajectory persisted over the weekend, closing at about $39,500 on Saturday and approaching $40,000 on Sunday. The price spiked overnight reaching a new level not seen so far this year.

This rise marks the seventh consecutive week of BTC price increases, a streak not observed since Oct. to Nov. 2020, more than three years ago. This demonstrates renewed confidence in the digital asset market, with BTC’s price increasing by approximately 55% during this period.

The recent upward trend increased BTC’s dominance by 1%, i.e. its market capitalization against the entire digital asset market, closing the week at 53.3%. The overnight spike in BTC further elevated it to 53.8%, underscoring BTC’s strength in comparison to the overall market.


Short Bitcoin trades starting to liquidate

The sharp BTC upswing resulted in the liquidation of around $150 million in short positions in the last twelve hours.

In moments of intense market movements, such liquidations often amplify the trend’s momentum, in this case, facilitating a substantial upward spike with BTC reaching the $42,000 level. Despite the price surge, approximately $50 million in long positions were also liquidated in the past 12 hours, totalling more than $200 million.

Regarding ETFs, the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE) continue to maintain low discounts, standing at 8.7% and 14.6%, respectively. This reaffirms investor confidence in the anticipated mass approval of BTC Spot ETFs in early January 2024.

The official closing of the comments period is set for January 4, leaving a window between Jan. 5 and Jan. 10, 2024, for approval or rejection. Since ETFs cannot be approved during the comments period, and with the deadline for 21Shares filing being Jan. 10, this six-day window will determine whether BTC Spot ETFs will be approved for trading in the US.

“Given the current market momentum, a retracement in December is plausible to reduce open interest and leverage before building an upward trend as the SEC decision deadline approaches,” said Matteo Greco, a research analyst with Fineqia International in Canada. “An approval is expected to bring short-term capital influx from the traditional finance investors, fueling the uptrend, while a rejection might trigger a short-term negative price action due to high expectations of approval by market participants. A rejection could prompt market participants to adjust their positions, potentially leading to a downward trend in January. Analysts remain confident, however, maintaining a 90% probability of approval.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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