Contributed Commentaries
The gold chop continues into a series of key events next week
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Although the European Central Bank (ECB) meeting on Thursday disappointed gold investors looking for a larger stimulus boost, the ECB expanded its debt purchase program and agreed to provide banks with ever more ultra-cheap liquidity, as long as they keep passing the cash onto companies. The ECB also said it is monitoring the euro’s exchange rate with regard to its possible implications for their medium-term inflation outlook.
Gold remained under pressure following this announcement yesterday, when U.S. Senate Majority Leader Mitch McConnell hit the brakes on the emerging COVID-19 aid package from a bipartisan group of lawmakers. McConnell said Republican senators will not support $160 billion in state and local funds as part of a potential trade-off in the highly anticipated stimulus deal.
Deadlines, along with the Federal Reserve recently pleading for more government stimulus, has not been sufficient to drive law makers to an agreement. Nor has the U.S. breaking a record-high 3,000 daily COVID fatalities, with hospitals straining at capacity from soaring caseloads nationwide.
Along with the global rise of COVID cases forcing governments to keep its citizens locked down, there will be a series of events beginning on Sunday which could dramatically increase the volatility in the marketplace and lift the gold price higher into year-end.
Brexit negotiations between the U.K. and the European Union are on course to end without a trade deal amid fears on both sides that their disagreements are too wide to bridge, officials familiar with the talks said on Thursday. European Commission President Ursula von der Leyen has given EU and UK negotiators three days to strike a trade deal as she declared: "We will take a decision on Sunday."
The Brexit decision will be followed by the U.S. Electoral College vote count on December 14th. Earlier this week, the state of Texas filed a motion asking for permission to sue Pennsylvania, Georgia, Michigan, and Wisconsin in an attempt to protect the integrity of the 2020 election. The Lone Star state alleges that the four key battleground states unconstitutionally changed election laws, treated voters unequally, and triggered significant voting irregularities by relaxing ballot integrity measures.
Furthermore, seventeen states this week are urging the U.S. Supreme Court to take up the Texas request to challenge the 2020 election results in the four battleground states. These states, led by Missouri Attorney General Eric Schmitt, filed a friend-of-the-court brief on Dec. 9th, underscoring that the case filed by Texas is of great public importance and requires the attention of the nation’s highest court.
Even though the electors’ votes typically align with the popular vote in each state, they do not have to in most states. And not all states require the votes cast by electors to mirror the popular vote. Speaking to reporters on the Thanksgiving holiday, Republican Trump said if Democrat Biden - who is due to be sworn in on Jan. 20th - is formally declared the winner by the Electoral College, he will depart the White House. Asked if he would leave the White House if the Electoral College votes for Biden, Trump said: "Certainly I will. And you know that."
Then on Wednesday, the last Federal Open Markets Committee (FOMC) meeting of 2020 will conclude when Fed Chair Jerome Powell will give his final policy meeting speech of 2020, followed by a virtual press conference. Gold has already priced in the central bank keeping rates low for the foreseeable future, along with no planned rate hikes until 2023.
Yet Powell remains committed to using 'powerful tools' to support the economy and thinks the Fed can do even more while congress stimulus talks have remained stalled. The minutes of the November 4-5 FOMC meeting, released on November 25th, indicated that the Fed will indeed do something next week to support the sluggish economy.
Whether it is increasing the pace of asset purchases, shifting purchases to longer maturities, or by conducting purchases of the same pace and composition over a longer horizon, the gold price will most likely reflect those changes. Looking ahead, we can expect the Federal Reserve’s monetary policy to affect ongoing gold demand.
Moreover, equities are looking toppy this week, while energy and commodities have been showing market leadership. With all three major U.S. stock indexes having hit new record highs recently on stimulus hopes and positive vaccine news, the number of S&P 500 stocks above their 200-day moving averages has risen above 90%, which is the highest level in seven-years.
Much has been written recently about a reflation trade that favors stocks tied to rising commodity prices and a weaker U.S. dollar, which is also gold bullish. When combined with central banks around the world continuing to flood the markets with liquidity, this makes the idea of owning hard assets such as gold very appealing.
Furthermore, gold is priced in U.S. dollars, at least in the futures market, so ultimately, a weaker dollar driven by a dovish Federal Reserve should continue to be a catalyst as the world's reserve currency likely continues its slide towards the next support level at 88.
The gold price has remained above support at $1825 since testing its 50-week moving average at $1767 last week, where it likely bottomed after a 4-month consolidation of out-sized gains.
Gold futures basis $1750-$1800 has technically become a critical support level, being an area where we have seen plenty of resistance going back to the 2008 gold bull. What was once strong resistance during the first phase of the secular gold bull that began at the turn of the century, has likely now become strong support during phase two, which began in late 2015 after a nearly 50% correction.
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