There were no surprises on the price front this week as gold remained stuck in a wide trading range around the $1,900 an ounce level. But as markets anxiously await the election, analysts point to one key driver that could push gold significantly higher before November 3.
Gold began the week just below $1,915 an ounce and on Friday afternoon was trading at $1,906.20. The price action has been highly dependent on the U.S. dollar moves, which fluctuate based on stimulus on/off headlines.
As the optimism of seeing the U.S. stimulus package before the election fades, markets are still holding out hope, analysts told Kitco News on Friday.
“There is one catalyst that could move gold prior to this election — some type of stimulus package,” said Kitco Metals global trading director Peter Hug. “And every day that goes by, it becomes less and less likely. But markets are still anticipating it.”
If there is stimulus on the table between now and next weekend, gold could see a move up through $1,925, Hug pointed out. On the downside, support remains at $1,875 and then $1,850. “Can’t see gold dropping below that unless there is a major market selloff.”
On the other hand, if there is no additional stimulus before the election, it could delay any fiscal help until January or February. “If the Democratic candidate Joe Biden wins, the stimulus package could be pushed out to January-February, when Biden takes office,” Hug noted.
Election expectations
Analysts remain in agreement that it does not matter which candidate wins the U.S. election, as both are good for gold due to the inevitability of more fiscal stimulus, a low-interest-rate environment, and weaker U.S. dollar. However, they note that a blue wave sweep at the polls is likely to trigger a bigger price rally.
“Election results will be the biggest thing going forward and how it will impact risk markets and effect fiscal stimulus,” TD Securities commodity strategist Ryan McKay told Kitco News. “Gold prices are agnostic to who the actual winner is as both candidates will put fiscal stimulus after the election. But a blue wave is the most beneficial as it would result in the most spending and will drive inflation expectations higher … This is shaping up nicely for gold to make another bull run.”
The next week might prove to be quite volatile as markets continue to price in the election, said Afshin Nabavi, senior vice president at precious metals trader MKS SA. “Not much is unlikely to change at least until November 3. Gold is stuck in this wide range, where we get $10-$20 moves on a daily basis,” Nabavi said.
After the election, gold’s rally could take the metal back up to $2,000 an ounce and then even $2,500 in early 2021, said Walsh Trading co-director Sean Lusk.
“No matter who wins the election, you will see stimulus. We’ve already printed so much money and every central bank in the world has taken the same action. I’m wondering if this house of cards could fall down. Coronavirus cases are resurfacing and further lockdowns are possible,” Lusk said. “Gold will be supported into the election and after. As long as the virus sticks around and we have ramifications of shutdowns, we are going to be on the defensive and metals are going to be the big winners at least in early 2021.”
The economic damage from the coronavirus crisis has been done quickly and it might take years to recover, Lusk added. “Tough thing to claw ourselves out of. Where else will the money go into? The more dollars we print, the less they are worth.”
One caveat about a Democratic win across the board is a potential selloff in equities as investors try to lock in their gains before higher taxes kick in, analysts noted.
“Possibly, it would be negative for gold. Biden’s platform calls for increased taxes. I would suspect he would raise taxes in 2021, which is why there should be selling in the equity market as players will try to lock in their gains. It is possible that gold might come under pressure,” Hug noted.
If that does happen, the dip in the gold price will be “an absolute buying opportunity,” he described. “There will be stimulus package whether Trump or Biden wins, and it will be very positive for equities and precious metals markets in the long-term.”
Another thing that could boost gold in the short-term is delayed election results, said FXTM market analyst Han Tan.
“The prudent investor should be prepared for the possibility of heightened volatility in the markets immediately following November 3, especially in the event of a delayed official outcome to the results. Should market participants be met with an extended period of political uncertainty after polling day, that could result in a surge of risk aversion that ensures safe-haven assets are well bid,” Tan said.
COVID-19 second wave
Aside from the election-related volatility, markets are also getting nervous about the rising coronavirus cases across the globe and the potential of renewed lockdowns.
“We in a second wave of COVID-19 and it could possibly derail the fragile economic recovery we have right now,” said Hug.
Any significant problems at the hospitals or major new lockdowns could trigger a similar market selloff like in March, Hug added. “That could have an impact on equities and subsequently, people rushing to raise cash. When people get scared, the first impulse is to raise cash, and then depending on how the government responds (usually by creating more money), that is when the commodity sector gets a lift,” he said.
As second-wave concerns grow and there is no new stimulus in the U.S. supporting households, the economic recovery comes under question, said ING chief international economist James Knightley.
“The case for fiscal stimulus is strong in an environment where unemployment benefits are being tapered and Covid-19 cases are rising, causing anxiety for households and businesses with the nagging concern that some form of containment measures could yet be introduced in the U.S.,” Knightley said on Friday.
Data to watch
The concerns around the economic recovery will make next week’s data especially important to watch, according to the analysts.
The biggest release on the radar next week is the U.S. Q3 GDP data, which is likely to show a strong recovery after a Q2 slump.
“We expect it to be a record 34.5% annualized growth thanks to consumer spending rebounding on pent up demand after lockdowns and the support for household incomes coming from increased unemployment benefits, which saw upwards of 70% of recipients receive higher incomes than when they were actually working,” Knightley said. “Even after this impressive figure we should note that economic output will still be 3.2% below that of the end of 4Q19.”
Other key data next week include U.S. new home sales on Monday, durable goods orders and CB consumer confidence on Tuesday, jobless claims and pending home sales on Thursday, as well as, PCE price index on Friday.
Also, the European Central Bank (ECB), the Bank of Canada (BoC) and the Bank of Japan (BoJ) will be making their interest rate announcements next week.
Source: Kitco News