Gold’s Standoff With Higher Yields And The US Dollar

Marius Paun | London, UK | Senior dealer | Thursday, 21st January 2021

Gold started the new year by disappointing investors. It rallied during the first few sessions to over $1959, pushed by the strong momentum from December 2020. Many were weighing the chances for a retest of the record high. Not this time. It quickly retraced and lost almost $150 in the past 4 days, only just remaining above $1800 mark.

History tells us that within great bull runs we can sometimes notice extended periods of consolidation or even short-term bear markets that can last for months and sometimes more than a year. Last year the gold price went from $1450 in early spring to nearly $2080 in August. It’s been on a downward slope ever since which may very well continue for a while. However, the long-term narratives of monetary stimulus increasing at a fast speed, chances the inflation will return, interest rates staying lower for longer, has not changed. And they still support gold as a hedge.

Nonetheless, let’s stick with gold’s fate in the short term for now. Its weakness in the past few weeks was blamed on the US bond yields, specifically the benchmark 10 year Treasury note moving above 1% and dragging the US dollar higher. Suddenly the expectations have shifted to possible higher interest rates pressure as a result of increased stimulus which will support economic growth, jobs creation and ultimately wage inflation.

Strangely the beneficiaries of Democratic-controlled Congress and US President Joe Biden’s agendas were the greenback and not the traditional inflation hedge gold. On the bright side, rising inflation should keep real interest rates negative which is supportive of gold.

Meanwhile, the gold market is awaiting President Joe Biden’s speech on his administration agenda to the economic crisis, to gauge its next direction. His proposed $1.9 trillion stimulus package already faces opposition in Congress only a week after it was announced. Republicans (and it now appears a few Democrats!) said they will vote against another coronavirus relief package. Joe Biden warned yesterday the US will likely reach 500,000 Covid related deaths by the end of February.

At the same time, investors are assessing the implications of fiscal spending. Although Covid -19 is still wreaking havoc, the vaccines are expected to do the job eventually and possibly bring a strong economic comeback later in the year.

In its gold outlook for 2021, the World Gold Council believes ‘investment demand will stay well supported with the precious metal consumption ready to benefit from nascent economic recovery, especially in the emerging markets’. So a bumpy road ahead, but later in the year investors could potentially navigate through calmer waters.

 

The chart shows a downtrend since the record high of August last year at $2075 with lower highs and lower lows. The short-term moving averages are now below the longer-term ones and both pointing lower. The price is also below both indicators. The $1850-$1860 range is where the battle between bulls and bears will likely take place in the immediate future.

On the downside, if the bears take the lead as it seems to go into the weekend, the initial support can be seen at $1830, followed by $1824 handle which coincides with Fibonacci 38.2% retracement of March-August uptrend. A close below that level could open the door for further losses towards the recent low of $1764 the low of November 30th.On the upside, there is resistance at $1850-$1860 as mentioned above followed by $1873 and $1886.