What’s Next for Gold?

So far this week, spot Gold prices have been whipsawed across a wide range exceeding $100. On Monday, it hit a near two-month high of $1965.59 before careening down to the $1850 mark, all within the same day. The precious metal dropped by as much as 5.85 percent on Monday, which erased all of Gold’s month-to-date gains, and more, while registering its largest single-day decline since August 11^th.

Despite the latest attempt to claw its way back up, Monday’s drastic drop leaves Gold below its 100-day simple moving average for the time being, with its 50-day moving average threatening to follow suit. For context, so far this year, Gold has not spent more than a week at a time trading below that key technical level, having recovered promptly after breaking below that mark in mid-March and in end-October.

However, with its three-month downtrend proving hard to shake off, and spot still more than seven percent lower from its all-time record high registered on August 7^th, are the heady days now over for Bullion bulls?

The vaccine teaser

The boost to Gold prices, stemming from the US presidential elections being called in Joe Biden’s favour, was dealt a major blow to the gut by positive developments surrounding the Covid-19 vaccine. The news that Pfizer Inc. and BioNTech SE have a Covid-19 vaccine that can prevent over 90 percent of infections prompted Gold traders to forecast a faster return to normalcy.

Such a narrative eroded Gold’s appeal as a traditional safe haven asset; hence Monday’s steep decline. Should the vaccine indeed prove to be an enabler of a steeper global economic recovery, that may also raise the bar on further monetary and fiscal stimulus, potentially further dampening more of Gold’s tailwinds.

Still, there remain major doubts over the timeline of the vaccine’s global rollout and its true efficacy. Such doubts may keep Bullion supported until there is more clarity about what the vaccine will actually achieve.

Political brinkmanship frustrates

While US stocks are brimming at the thought of a divided US government, such prospects in turn cap Gold’s upside. With Democrats unable to push through a larger fiscal stimulus package, it threatens to derail the US economy’s nascent recovery and weaken the momentum in US inflationary pressures.

Although a vaccine that allows a swifter return to economic normalcy could still deliver a shot in the arm for US price pressures, such a mix may be deemed less potent than a multi-trillion-dollar fiscal boost. And monetary policy can’t do it all alone, with Fed chair Jerome Powell harping on the fiscal side to carry their fair share of the stimulatory burden.

Look out for potential catalysts

With the initial post-election euphoria having fizzled out, investors have quickly shifted their attention to the lame-duck Congress session, to see if lawmakers can look past the wounds freshly inflicted from the bruising election battle and agree to a fresh round of US fiscal stimulus. Failing that, a pair of January run-offs in Georgia could then dictate whether Democrats will have enough muscle through the chambers of Congress to push their agenda through. Such a make-up in the US Senate could help restore some of Gold’s sheen, pending the extent of the vaccine’s global rollout by then.

Even if the masses in major economies do embrace the vaccine, the mental scars from the pandemic may still linger on, and such persistent fears may continue dulling global economic activity. Such an economic environment may still necessitate further stimulus measures from policymakers, which would then boost the precious metal’s appeal as a hedge against inflation and a preserver of wealth.

And of course, US Treasury yields will continue to have a dominant say over Gold’s performance. Should the 10-year yields breach the psychologically-important 1% mark, that may well spur more selling of the precious metal.

Gold bulls still waiting at the alter

However, for those who still harbour hopes that Gold still possesses enough reasons to launch another attempt at a new record high, they still must be given fresh impetus to send prices charging higher. Until then, at least the precious metal can still find some measure of comfort from US real yields, which remain in negative territory, which in turn is also keeping Gold’s arch-nemesis, the Dollar, in check.

Written on 11/11/20 08:00 GMT by Han Tan, Market Analyst at FXTM

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