Gold Struggles For Direction Swinging Around $1900

Marius Paun | London, UK | Senior dealer | Thursday, 22nd October 2020

A resurgence in Covid-19 infections around the world, heated debates regarding the US stimulus as well as Brexit negotiations has all kept gold at arms’ length lately. Safe haven demand has benefited the US dollar rather than gold and also pushed equity markets lower. It’s been reported that US Treasury Secretary Steven Mnuchin stated it’s getting increasingly difficult to reach a deal with Democrats on the fifth coronavirus relief package before the November presidential elections.

There are speculations that dirty politics is getting in the way, especially when Democrats (they might think no stimulus could make voters angry and as such help Joe Biden) have rejected even a smaller amount offered by the White House as a first step. In the UK vs EU negotiations, officials expressed willingness to reach an agreement but the press conference last Thursday revealed the failure on the outstanding key issues, fishing and level playing field.

Recently, gold prices moved below $1900 an ounce after peaking at $2075 back in August driven by a higher greenback and lower yields on US Treasuries. Despite that, HSBC forecast that ‘the need for monetary easing and fiscal support should be ultimately positive for the yellow metal’. What’s a bit odd this time around is that as a hedge against times of turmoil when markets get jittery, gold should ultimately benefit. After all, the Government can’t print more of it and it weathers inflation rather well.

As a rule of thumb when recession strikes, stock markets tank and gold prices rise. As an example, between mid-2007 and mid-2009, the S&P was down more than a third, whereas gold was up over 40%. It’s true it moved down initially but then recovered and started its famous rally. Not this time or not yet?.. remains to be seen.

Gold did follow violent sell-offs in equity markets in 2020. On one hand, fading hopes of a US stimulus package and heightened uncertainty regarding the US election might keep the precious metal in check. On the other hand, the International Monetary Fund reckons the unprecedented fiscal and monetary support (in the region of $12 trillion so far) which limited the pandemic damage ‘must be maintained’. That should spur gold buying in the medium to long term as fiat currency devaluation looks a dead certainty going forward.

JP Morgan also ran a few scenarios and see a potential democratic sweep as the driver for a 2%-5% spike in gold prices fuelled by a weaker US dollar. Markets see a Biden win as potentially negative for the markets because of tougher tax and regulatory agenda. So, a return to the inverse correlation between gold-stock markets? If Biden wins but the Republicans hold the Senate, the investment bank thinks gold could increase by around 2%.

A win for the incumbent President Donald Trump is seen potentially pushing the precious metal 5% lower on a stronger dollar. What about a contested outcome? Again, the consensus has a weaker gold at the beginning and then moving higher on safe-haven demand if things really turn ugly and the outcome is delayed for longer? All food for thought.

Gold investors could find reassurance in the fact that legendary stock picker Warren Buffet bought 20.9 million shares of giant miner Barrick Gold Corp last quarter, according to a filing for Berkshire Hathaway. Buffet is well known for previously staying away from gold adding it does not produce the same returns as company shares, it ‘does not do anything but sits and looks at you’.

So it is reasonable to assume the next few weeks could remain volatile and one could wonder if the long term positive outlook for gold is still intact?

The chart shows the formation of a sideways trend in the last few weeks between $1933 and $1848. The signals are a bit mixed. Yes, we saw the short-term moving averages crossing above the longer-term one on October 9th. But they start to point lower and today the market price has once again moved below both of them.

On the downside, the initial support can be seen at $1891, followed by key support that has formed around $1880 handle, which coincides with Fibonacci 50% retracement of May-August uptrend. A close below that level could open the door for further losses towards $1848, the low of September 28th. On the upside, there is resistance at $1920, Fibonacci 38.2% retracement, followed by $1933 and $1955.