Gold was boosted by USD weakness and a Covid-19 toll that continued to rise with record daily global increases and fresh US outbreaks. In addition, recommencing containment efforts are a definite risk to the outlook.
These discomfiting developments put a firm bid in gold on pre-weekend trade. A higher Covid-19 count and, more notably, a weaker USD does seem to always do the trick for gold. All the while, US-China tension simmer with media sources discussing the possibility that the US was considering banning travel to the country by all Chinese Communist Party members also helped gold.
A higher Covid-19 count is a huge worry for US policymakers as this is a Fed completely consumed with job creation and stabilization. Although they haven’t explicitly stated "employment targeting.", for the moment it’s all about the labor market for the Fed.
It’s been documented by readily available mobility data that we can see a leveling off in small business activity and restaurant seating, mainly in response to the virus flare-ups and lockdowns in the most affected states. This could have a more pronounced effect on the labor data going forward until the lockdowns are lifted. Indeed, the US labor market could face more significant headwinds for some time and present a considerable challenge to the view and will cause the Fed to top up the punch bowl continually, all of which should be good for gold.
However, the closer we get to the end of the runway on monetary policy effectiveness and the mixed traction for the new fiscal effort that meets stiffer resistance by moderates and fiscal hawks alike who are pointing the ballooning deficits, a new catalyst would definitely help.
But, fortunately for gold bulls, we’re in a US election year where no one in Congress outside of most ardent fiscal hawks wants to wear the scarlet letter and be seen branded as frugal, especially when it comes to covering Main Street backs. From that perspective alone, gold has room to float.
And, on cue, two of the most respected Fed Chairs of all time had their say on Friday; former Federal Reserve Chairs Ben Bernanke and Janet Yellen urged Congress on Friday to help the economy deal with the negative impact of the pandemic. The two said that new measures should provide substantial support to state and local governments and argued that Congress should avoid the Great Recession mistakes where state and local governments did not get adequate help. This call for more fiscal spending is gold supportive – and trust me: when Ben and Janet speak, the market and lawmakers listen.
I continue to remind clients regularly in my daily reports that given weeks of rallying and being up nearly 20% year to date, gold may need an extended period of consolidation and see some profit-taking or even find a new catalyst. Given the length of gold positioning, that does present some challenges.
Still negative real interest rates, ballooning central bank balance sheets, ongoing increases in Covid-19 cases and geopolitical risks boost safe-haven and quality asset demand for gold. None of this looks likely to change soon, so gold should remain supported.
Gold could face the rally slayer in the form of a vaccine. While this is an enormous challenge to the near-term view, it might not necessarily impair the longer-term prospects for gold.
The huge dueling US deficits will continue to attract buyers to hedge the weaker US dollar, while strategic buyers could load up on the dip to defend the ensuing reflation surge that will occur as the vaccine should provide an all systems go lift-off for commodity markets.
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