Since the beginning of October, gold had been trading in a $4,100-$4,200 range. On Thursday, this range was broken to the downside, and then technical selling kicked in - those who had bet on continued gains closed out on their stops. The round level of $4,000 now acts as support, below that - $3,950 and the $3,900 zone.
The reason is not a single event. Tensions in the Middle East are keeping WTI oil near $100 per barrel - at five-week highs. Expensive oil fuels inflation, which means US rates will stay high for longer. For gold, this is a direct negative: the metal pays no interest, and the higher the yields, the more expensive it is simply to hold.
The paradox of Thursday is that gold did not rise even on the stock market decline. The S&P 500 fell 1.2% to 7,663, dragged down by the Philadelphia Semiconductor Index, which hit its lowest since July. The yield on 10-year US Treasuries dropped below 5% for the first time since September, and the 2-year fell below 4.75%. According to Rabobank, some traders were selling the metal to cover losses on equities. The DXY (dollar index) was around 101.78, up 0.14%.
What's next: next week is the Fed meeting, where the rate will most likely be left unchanged after a 25 basis point hike in September. The market is pricing in about an 80% probability of a hike in December - it is precisely the hints at this move that will be the main risk for gold. On Friday, the preliminary S&P Global business activity indices for October and the final University of Michigan consumer sentiment index with inflation expectations are released.
Did you catch this flush below $4,000 on your account?
The move from $4,100 to $3,986 in a session and a half is a range everyone sees, but on an account of a couple thousand dollars it turns into the cost of one dinner. The gap is not in the analysis, but in the trading notional: the same candle on a $100k account and on a $2k one are two different outcomes. In prop trading, the notional is provided by the company: you pass its evaluation stage and trade its account, receiving a share of the profit. The Fed meeting is already next week - it's worth understanding the mechanics before then.