The gold market in a wait-and-see mode ahead of new U.S. political regime
New York (Jan 19) The gold market once again remains caught in a tug of war between expectations of an improving economy and rising inflation pressures as President-elect Joe Biden prepares to take office.
The gold market has seen a strong bounce off of support around $1,800 but analysts note that the precious metal is struggling to find new momentum as prices remain below critical initial resistance at $1,850 an ounce. February gold futures last traded at $1,840 an ounce, up 0.56% on the day.
According to some analyst President-elect Joe Biden’s proposal for a $1.9 trillion aid package is boosting hopes that it will lead to stronger economic growth later in the year. These expectations has boosted bond yields to nearly a one-year high and has pushed the U.S. dollar to a critical resistance point.
In a report published Tuesday, economists at Capital Economics said that they expect that along with a vaccine, fiscal stimulus could push U.S. economic growth up by 6.5% this year.
“Boosted by the stimulus cheques, enhanced unemployment benefits and the eventual rollback of containment measures, we expect consumption growth of 8.2% this year,” the analysts said.
Along with expectations for a strong recover this year, some analysts have said that that fading geopolitical tensions is also weighing on gold’s safe-haven demand. In less than 24-hours Biden will become the 46th President of the U.S.
“With the market looking at $1.9 trillion aid package, gold prices should be much higher, but right now the market is in a digestion phase as we see the start of a new political regime,” said Christopher Vecchio, senior market analyst at DailyFx.com. “The market is also digesting what impact the stimulus plan will have on growth.”
Vecchio added that if the new spending measures does boost growth it could limit the impact of rising inflation, which would cause real yields to rise, a negative environment for gold. However, he added that in a low interest rate environment, even if growth does pick up, it won’t have a major impact on real yields.
Daniel Pavilonis, senior commodities broker with RJO Futures said that he also sees gold prices currently in a wait-and-see mode as market dynamics start to change.
Pavilonis added that although Democrats will control Congress and the White House, there is no guarantee that the new administration will be able to pass the full package.
However, he added even if only parts of the package get approved, the increase in stimulus is a long-term positive for the precious metal.
“Right now I think we have to wait and see just what is going to happen with this new administration. We have gold bounce solidly higher off its 50-day moving average,” he said. “I think the market still wants to get above $2,000 we just need to site tight.”
Bart Melek, head of commodity research at TD Securities said that he doesn’t rule out seeing lower prices in the near-term as investor optimism drives economic growth expectations.
However, he added that he still sees gold prices pushing above $2,000 an ounce as he expects inflation will be a bigger influence for investor than growth.
“We are going to see real yields go up as the economy improves but I think that is when the Federal Reserve will step in,” he said. “The Federal Reserve can’t afford to get interest rates go higher. I think the fears of tightening interest rates are unfounded at this point.”
Along with higher interest rates, Melek said that gold investors can also expect to see a stronger U.S. dollar in the near-term, which is another negative for gold. However, he added that as the global economy starts to improve, he predicts that investors will move away from the U.S. dollar and into higher yielding emerging market currencies.
On the downside, Melek said that he expects critical support around $1,767 an ounce hold and signal a near-term bottom for the market.
Lukman Otunuga, senior research analyst at FXTM said that he is also watching the U.S. dollar for where gold is headed next.
“Bearish investors remain inspired by a stabilizing Dollar, rising bond yields, and easing geopolitical tensions. However, bulls are drawing strength from surging coronavirus cases, renewed lock-down restrictions, and the great ‘reflation trade,’” he said. “Looking at the technicals, the price action suggests that the metal is waiting for a fresh directional catalyst before breaking out of its current range. Given how gold is trading below the 200-day simple moving average, the technical outlook on the daily charts swings in favour of bears. However, this could change if bulls are able to push prices back above $1,850.”
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