After a sharp decline approaching "oversold," has gold bottomed out?

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After several months of deep adjustment, gold is now standing at a critical intersection of technical and fundamental factors.

Since the end of February this year, gold prices have fallen by about 22%, but multiple technical indicators show that selling pressure is weakening. The weekly RSI is approaching oversold territory, and the daily chart shows signs of RSI bullish divergence.

Meanwhile, physical demand remains resilient, speculative long positions are at historic lows, and overall market sentiment is indifferent. This combination is accumulating conditions needed for a potential "short squeeze" event.

However, Giovanni Staunono, Chief Investment Office Commodity Strategist at UBS, points out that historically, gold has performed best during periods of declining real interest rates, while the current Federal Reserve policy path remains highly uncertain.

Technical Analysis: Wedge Narrows, Direction Ready to Break Out

From a chart structure perspective, gold is currently squeezed between two key trend lines: one is the long-term rising support line, the other is the descending resistance line that has suppressed prices since early March.

The wedge formed by the two lines is increasingly narrowing, and the breakout direction will be of decisive significance.

If gold prices effectively break above resistance, the technical short squeeze could be quite intense.

It is worth noting that after months of persistent decline, gold's weekly RSI is now approaching the oversold region, a level that has historically often coincided with cyclical lows.

Additionally, gold prices are still below the 200-day moving average, and market sentiment is indifferent. Analysts believe that previous weak hands and short-term positions have largely been cleared out; once resistance above is effectively broken, the inflow of systematic buying could make the rebound much larger than expected.

Option Signals: Market Still Hedging Downside, Skew Suggests Reversal Potential

The pricing structure in the options market provides another perspective.

Currently, gold options exhibit negative skew, meaning participants are paying significantly higher premiums for downside protection than for upside options.

This stands in contrast to gold's usual pricing patterns. Under normal conditions, gold displays upside skew, because its safe-haven qualities during crises lead the market to prefer paying for upside scenarios.

The current negative skew suggests investor anxiety is more focused on further downside risk.

However, it is precisely this widespread "one-sided thinking" that forms the psychological basis of a short squeeze scenario.

Analysts point out that, from an options strategy perspective, capturing potential short squeezes through call spreads is attractive, providing leverage to upside breakouts at lower cost.

Macro Background: Fed Path Unclear, Real Interest Rate Trend Uncertain

The macro logic behind this round of gold price declines partly comes from market expectations of Fed rate hikes to tackle inflation. Investors worry that rising rates will make cash more attractive relative to the zero-yielding asset gold.

However, the Fed's actual policy trajectory remains full of uncertainty. According to CME data, the market currently sees about a 50% implied chance of a rate hike before September.

The new Fed chairman Walsh is resistant to forward guidance, so far only making principle-based statements about maintaining price stability, with very limited substantive policy signals.

He has also convened multiple working groups to research topics such as inflation drivers and the impact of AI on productivity, with related reports anticipated only by the end of the year.

This uncertainty has generated several scenarios:

If the Fed is slow to respond to oil price shocks, broader inflation pressures may build;If the AI investment boom cools off and forces the Fed to loosen monetary policy, while geopolitical factors keep oil prices high, real interest rates could also fall.

Both scenarios above are potentially bullish for gold.

Allocation Logic: Stock Market Optimism Surges, Gold’s Hedging Value Stands Out

From an asset allocation perspective, gold’s current logic has not been completely broken.

During this round of geopolitical conflicts, the stock market overall has remained strong; equity investors are highly optimistic about AI prospects, while their vigilance against geopolitical and other potential risks is relatively low.

This “risk premium shortage” market state is exactly the reason to keep gold positions as tail risk hedges.

UBS Chief Investment Office Commodity Strategist Giovanni Staunono points out that gold has the drawback of not generating any yield, but during periods of concentrated uncertainty, maintaining some allocation to gold to hedge against unforeseeable risks makes reasonable portfolio sense for investors.

At present, technical signals, position structure, and physical demand are resonating, providing conditions for a potential directional breakout in gold. Whether the short squeeze truly materializes still depends on clearer Fed policy signals, dollar trajectory, and geopolitical developments.

Risk Warning and DisclaimerThe market carries risk, and investments should be made with caution. This article does not constitute individual investment advice and has not taken into account any specific user's particular objectives, financial situation, or needs. Users should consider whether the opinions, views, or conclusions in this article fit their own circumstances. Investments made based on this article will be at the user's own risk. ```