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How much chaos will gold price see next week? U.S. election, Fed meeting, jobs data on the docket

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(Kitco News) The gold market is holding its breath before the most eventful week of the year, according to analysts.

The first week of November will not only see the most anticipated event of the year — the U.S. election, but also the Federal Reserve interest rate decision and some key datasets, including the U.S. employment figures from October.

And this is already on top of the extremely volatile price action gold has been seeing during the last week of October. The precious metal wrapped up the month by losing its key $1,900 an ounce level as prices touched a one-month low of $1,859 on Thursday. At the time of writing, December Comex gold futures were trading at $1,880.20 an ounce, up 0.65% on the day.

The gold space is seeing very low volumes as most of the price action is guided by algorithmic trading with investors waiting out the uncertainty on the sidelines, according to the analysts.

"The volume in the December contract is only 134,000 contracts. So, a lot of trading here is algorithmic trading. A lot of investors have hit the sidelines for right now. Also, we've seen increases in margin rates. That's what exacerbated that selloff," Phoenix Futures and Options LLC president Kevin Grady told Kitco News.

With so much uncertainty in the air, analysts do not advise selling gold into the election. In fact, the majority suggest looking past the election-related noise and onto the longer-term macro drivers, which are very supportive for the precious metal.

"People that are holding metals absolutely should not be selling into the election," said Kitco Metals global trading director Peter Hug. "People not holding the metals and who wish to diversify 10%, I would be of the mindset that you would want to put a small amount, about 3% into the election."

Next week's scenarios

Both, a blue wave or a red wave at the polls will have a positive effect on gold, with the former likely to trigger the biggest gold rally, said Hug. The most significant risk, however, is posed by unclear results or a contested election.

Markets have been receiving mixed messages in terms of Joe Biden's versus Donald Trump's ability to win the election, noted Hug.

"There is going to be volatility coming into Monday, Tuesday night. The real trading days will be Wednesday, Thursday, and Friday," he said. "No matter who wins, there is going to be a significant stimulus package put into the market, which would be very bullish the metals."

There is consensus building in the marketplace that no matter who wins, the U.S. will get the fiscal stimulus, and will continue to have low-interest rates, said TD Securities head of global strategy Bart Melek. "If we have a blue wave, we borrow and spend more and gold rallies. If we have a red wave, we spend a bit less, but it is still good for gold."

The biggest unknown is whether the election results will be known right away. "If there is a clear winner, stocks will be up, and metals will be up either throughout Tuesday night or by overnight trading in Europe," said Hug. "If it is a contested election, where there is no clear winner or the results are delayed for a few days, the stock market will come under pressure, people will move to cash, and that could be negative for the metals."

The main question next week is whether the U.S. will have an answer on day one, added Grady.

The worst-case scenario for gold would be a contested election because it creates fear and delays the fiscal stimulus package, said Melek.

"Once we have clear results, we are getting the stimulus. Maybe not as big if we get a divided government, but we will get something. And right now, markets have sold off because we got nothing," Melek said.

Critical levels for next week

Gold's short-term support is around $1,850 an ounce, and resistance is at around $1,920-25, according to analysts.

If $1,925 is broken on the upside, gold could see $1,970, noted Grady. Also, while $2,000 an ounce remains possible for next week, Hug said it is "not likely."

Why you should look past the election

Markets tend to think the election matters more than it actually does. Capital Economics assistant commodities economist Kieran Clancy told Kitco News.

"In some ways, the election is a bit of a red herring," he said. "We might get a bit of volatility next week. There's clearly a lot of uncertainty. But ultimately, those moves will prove to be pretty short-lived because ultimately, they didn't really change the landscape for [what actually drives gold] — the real yields."

The 2016 Trump election provides an excellent example — the markets saw a lot of volatile moves that were eventually reversed, Clancy pointed out.

"The Trump election of 2016 provides a pretty good blueprint. There was a huge amount of market movement following Trump's election, and people were focused more on what he could do than what he couldn't do. They were focused on things that ultimately didn't come to pass. And a week or two later, all those moves have unwound. And I suspect we'll see something similar this time."

At the end of the day, it's the real yields that have been driving gold this year, which means that the metal's price action is highly dependent on the U.S. economy and the Federal Reserve.

"For gold, it's the real yield story. What we saw from about March until August was that real yield fell very sharply. Since then, they've sort of started to stabilize or maybe even drift upwards. And that explains why gold had its correction and then subsequently why it struggled to make much ground," said Clancy.

The key question for gold then is, what will happen to real yields? Capital Economics sees gold at $2,000 an ounce by year-end, which is more than $100 higher than the current trading levels, and this is why:

"Real yields are broken down into nominal yields and inflation compensation. The Fed is going to keep nominal yields very low for a very long time. So what is going to dictate what happens to real yields is inflation compensation. Provided the economic recovery starts to accelerate later this year or perhaps into next year, inflation compensation will start to pick up," Clancy said. "So, if we're seeing that nominal yields won't be allowed to rise very far and inflation compensation is picking up, that suggests that real yields will be drifting downwards again, and that is what underpins our forecast for gold," Clancy explained.

Fed meeting, jobs numbers

Aside from the election on Tuesday, markets will have a slate of economic data to digest, including the Federal Reserve rate announcement on Thursday.

Analysts expect the Fed to continue to stress the need for fiscal stimulus at next week's meeting.

"The Fed [is likely] to retain its dovish bias at Thursday's FOMC meeting with a promise to stand by and offer more stimulus if required. We would expect to see them reiterate the point that fiscal policy is a more effective tool at this juncture," said ING chief international economist James Knightley.

On the data front, Friday's employment numbers out of the U.S. will take center-stage as well, with the economy estimated to have added 600,000 jobs in October, according to market consensus.

Next week, other key releases include the Bank of England monetary policy meeting on Thursday, U.S. PCE price index and ISM manufacturing PMI on Monday, U.S. factory orders on Tuesday, ISM non-manufacturing PMI and ADP employment on Wednesday, as well as, jobless claims on Thursday.

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