Following months of deep correction, gold stands at a critical juncture where technical and fundamental factors converge.
Since late February, the gold price has fallen approximately 22% cumulatively, yet several technical indicators suggest selling pressure is waning. The weekly RSI is approaching oversold territory, while the daily chart shows an RSI bullish divergence signal.
Concurrently, physical demand remains resilient, speculative long positions are at historically low levels, and overall market sentiment is cooling. This combination is accumulating the conditions necessary for a potential short squeeze.
However, Giovanni Staunovo, Commodity Strategist at UBS Chief Investment Office, points out that historically, gold's best performance periods often correspond to phases of declining real interest rates, while the current path of the Federal Reserve's policy still holds considerable uncertainty.
Technical Perspective: Wedge Narrows, Directional Move Awaited
From a chart structure perspective, gold is currently caught between two key trendlines: one is a long-term rising support line, and the other is a declining resistance line that has been suppressing the price since early March.
The wedge formed by these two lines is narrowing progressively, and the direction of its breakout will be of decisive significance.
If the gold price effectively breaks upward through the resistance, the force of a technical short squeeze could be quite intense.
It is noteworthy that after months of sustained weakness, the weekly RSI for gold is now nearing oversold territory, a level that has historically often corresponded to interim lows.
Furthermore, the gold price is currently trading below its 200-day moving average, and market sentiment is cooling. Analysis suggests that the earlier, less committed followers and short-term positions have largely been cleared out. Once overhead resistance is effectively broken, the influx of systematic buying could lead to a rebound exceeding expectations.
Options Signals: Market Still Hedging Downside, Skew Hints at Reversal Potential
The pricing structure in the options market offers another dimension for observation.
Current gold options exhibit a negative skew, meaning market participants are paying a much higher premium for downside protection (put options) compared to upside options (call options).
This contradicts gold's typical pricing pattern. In normal environments, gold often exhibits a positive skew, as its safe-haven attribute during crises prompts markets to pay more for upside scenarios.
The emergence of the current negative skew indicates that investor panic is more focused on the risk of continued decline.
Yet, it is precisely this widespread "one-sided thinking" that forms the psychological foundation for a short squeeze.
Analysts note that from an options strategy perspective, using call spreads to capture a potential short squeeze is attractive, offering the chance for non-linear gains if gold breaks upward, with relatively low-cost exposure.
Macro Backdrop: Fed Path Unclear, Real Rate Trajectory Holds Variables
The macro logic behind this round of gold's decline partly stems from market expectations of the Federal Reserve raising interest rates to combat inflation. Investors worry that rising rates will enhance the appeal of cash relative to non-yielding assets like gold.
However, the Fed's actual policy direction remains highly uncertain. According to CME data, the market's implied probability of a rate hike before September is currently around 50%.
The new Federal Reserve Chair has shown reluctance towards forward guidance, having so far only made principled statements about maintaining price stability, offering very limited substantive policy signals.
He has also convened several working groups to study issues such as inflation drivers and the impact of AI on productivity, with related reports potentially not available until year-end.
This uncertainty gives rise to multiple scenarios:
If the Fed acts too slowly in responding to oil price shocks, broader inflationary pressures could build.
If a cooling AI investment boom forces the Fed to ease monetary policy, while geopolitical factors keep oil prices elevated, real interest rates could also decline.
Both of the above scenarios are potentially positive for gold.
Allocation Rationale: High Equity Optimism Highlights Gold's Hedging Value
Examining from an asset allocation perspective, the fundamental logic for holding gold has not been completely broken.
Equity markets have remained largely resilient during this period of geopolitical conflict. Equity investors maintain high optimism about AI prospects, while their vigilance towards geopolitical and other potential risks is relatively lower.
This market state of "insufficient risk premium" is precisely the reason to retain a gold position as a tail risk hedge.
Giovanni Staunovo points out that the cost of holding gold is that it yields no income, but during periods of concentrated uncertainty, maintaining a certain allocation to gold as a hedge against unforeseen risks holds reasonable portfolio significance for investors.
Currently, the convergence of technical signals, positioning structure, and physical demand provides the conditions for a potential directional breakout in gold. However, whether a short squeeze truly materializes still depends on further clarity regarding Federal Reserve policy signals, US dollar movements, and geopolitical developments.
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