It's Time to Short Gold: What Technical and Fundamental Analysis Are Revealing

Gold has been a shining star these days, chased as the best dollar-alternative safe asset, with three consecutive years of double-digit performance and a solid return of over 25%+ this year, enticing more investors to join the party. Doubts about U.S. exceptionalism, central banks rushing to gold, weak dollar, and elevated geopolitical tensions have all supported gold's momentum. However, at some point, the crowded trade has transformed gold into a speculative asset rather than its original hedging purpose. Technical indicators, early signs of fundamental shifts, and more evidence suggest it's time to move away from gold or even consider shorting it.

Gold futures briefly touched a record high of $3,500 per ounce on April 22, as President Donald Trump declared, "who has the gold makes the rules," and expressed a serious intention to fire Federal Reserve Chairman Jerome Powell. Gold surged 2.6% to above $3,500 during Asian trading that day but eventually turned negative by market close. This formed a "big black candle pattern," a significant bearish signal. Since then, gold has fluctuated but failed to break the previous high, potentially forming a double-top pattern.

It's interesting to observe how Trump's threats pushed supposedly stable gold prices to extremes, while rational big funds cashed out during the rally, which was driven purely by animal spirits. Trump's words would not fundamentally shift gold, and he eventually admitted that he did not intend to fire Powell due to hurdles and public opposition.

Analyzing gold futures data over the past three years, the rolling 7-day volatility has aggressively surged this year, implying a crowded trade and speculative frenzy. With mean-reversion theory, as gold volatility remains elevated, the enthusiasm may suggest an impending pullback.

In the noisy world of gold trading, traders should distinguish real drivers from mere distractions, presenting opportunities for arbitrage. For instance, will the conflict between India and Pakistan indeed benefit gold higher? The answer is not likely, as the scale is far less significant than the Russia-Ukraine conflict. Gold briefly surged when the latter war began in February 2022, but the annual return for that year was actually negative. Real triggers would be more central banks rushing to gold, such as China and Japan committing to buy more, and dump Treasuries.

Returning to technical analysis, as Trump prepares to announce a trade deal, solid U.S. economic performance and earnings so far, coupled with Powell's effective communication on a positive outlook, the double top pattern is forming. The lower-high chart points to a bearish outlook, with gold potentially dropping to $3,230 in the short term, the Support 1. Gold may struggle at that level, but if it falls below $3,200, a psychological mark favored by quant traders, more downside is likely, with the next support level as low as $3,000.

If holding a bearish position on gold, now is the optimal time to short it, as the short-term pullback could reach $3,200, implying nearly a 100% return if shorting gold futures now. However, futures require constant monitoring, setting limits/stop losses, and frequent trading. For those retail investors seeking more time to observe the downside and leverage, GLD put options are a good choice, or even selling GLD calls for a safer bet.

Now, let's consider the fundamental analysis. As discussed earlier, gold is closely related to dollar dominance. Examining the chart below, over the past two years, gold has consistently rallied alongside dollar depreciation (Dollar Index), as noted in Phase 1 and Phase 2.

Phase 1 spans from May to October 2024, when investors anticipated rate cuts throughout the year, and the Fed eased more than expected, driving gold higher with a soft dollar. Phase 2 began this January, with gold moving significantly higher at the expense of dollar depreciation and increased volatility compared to Phase 1. Trump's tariffs have prompted big players to act, and his intention for a weaker dollar may trouble the U.S., leading funds and central banks to rush to gold and dump treasuries, further boosting gold prices.

However, it's important to note that China, which owns 6% of global gold reserves, is slowing its gold purchases amid record high prices and a stronger yuan. China's central bank, PBOC, purchased about 70,000 troy ounces of bullion in April, down from 90,000 in March and 160,000 in February. Although the PBOC has expanded its gold reserves for six consecutive months, the pace has slowed.

This deceleration suggests China's cautious stance on gold due to record price levels and high volatility. Another possibility is that the PBOC is buying gold to protect currency stability, requiring dollars for gold purchases, and thus selling yuan to acquire dollars. This selling could help depreciate the yuan against the USD, making exports more attractive amid Trump's aggressive tariffs on the yuan. With USD/CNY fixed at 7.24-7.30, the PBOC seems satisfied with that level. As the dollar stabilizes, the central bank may decide to slow gold purchases and wait.

Meanwhile, Trump's ongoing trade deals with the UK, India, Japan, Korea, and others, along with a solid U.S. economy and earnings so far, could lead to a dollar recovery in the short term. This, combined with the slowdown in central bank gold purchases, raises questions about gold demand at current high levels. Therefore, investors may need to move away from gold or even consider a bearish position.