(Kitco News) Gold’s recovery is not running out of steam yet, as prices are up nearly $50 in just two days this week.
A record number of daily coronavirus cases and hopes of more stimulus are keeping the precious metal well supported, according to analysts.
“Gold gained … as the markets reassess the level of risk in the system,” said Rhona O’Connell, head of market analysis for EMEA and Asia regions at StoneX. “The onward march of the virus through the United States has combined with the continued seeming intransigence on the Hill, with sclerotic progress over the government funding bill.”
On Tuesday, the U.S. surpassed 15 million confirmed coronavirus cases, which is the highest total in the world. On average, more than 200,000 Americans are testing positive for the coronavirus on a daily basis, according to Johns Hopkins University data.
As the week progresses, all eyes are on more stimulus as the U.S. policymakers continue to debate the coronavirus relief package and a $1.4 trillion spending bill, with Friday being viewed as the deadline to avoid a government shutdown.
One way to delay the deadline would be for the U.S. Congress to vote on a one-week stopgap funding bill, which would provide more time to come to an agreement on both spending and the COVID-19 relief.
A key level gold investors are watching now is a breach of the 50-day moving average of $1,879 an ounce, O’Connell pointed out. “Gold’s breach of the 20D M.A. yesterday propelled a test of the 50D today at $1,879. So far, this has proved impenetrable; 20D offers support at $1,845,” she wrote on Tuesday.
At the time of writing, February Comex gold futures were trading at $1,875, up 0.48 on the day.
Despite the short-term inability to move into the $1,880s, gold has staged an impressive U-turn in December after falling below $1,800 an ounce last month.
“Gold has reversed most of its price slide in November. In view of persistently high numbers of new corona cases, which are resulting in tougher lockdowns (e.g. California, Germany), there is growing pressure on politicians to roll out further stimulus measures,” said Commerzbank analyst Carsten Fritsch.
The reason why hopes of more stimulus are boosting the price of gold is the fear of inflation, the analysts said.
“New debt-financed economic aid would drive up inflation expectations. Since interest rate expectations are fixed because central banks have promised to continue their ultra-expansionary monetary policy, real interest rates will slide ever deeper into negative territory. This, in turn, is a key argument in favor of a rising gold price,” said Fritsch.
On top of the fiscal stimulus, there is the Federal Reserve, which meets for the final time this year next week, said T.D. Securities strategists. Inflation expectations will be one of the primary drivers for gold in 2021, the strategists added.
“The Fed will likely increase the weighted average maturity of its Treasury purchases, helping to suppress term premium and thereby to support precious metals,” they said. “A continued economic recovery will once again fuel investment appetite in gold as an inflation-hedge asset. In fact, market-based expectations continue to suggest that inflation expectations are rising, which should ultimately drive capital to shelter itself in the yellow metal’s warm embrace as nominal yields remain capped.”
Another important trigger to monitor this month is gold-backed ETFs flows, which peaked in October and have been registering outflows in November, Fritsch noted.
“Though gold ETFs registered slight outflows again yesterday, these were attributable first and foremost to the SPDR Gold Trust – others already seeing slight inflows again,” he said.
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