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Selloffs in gold are 'misguided': Focus shifts to Fed's minutes and December meeting - analysts

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(Kitco News) This week's focus will be on the Federal Reserve meeting minutes as markets try to navigate positive vaccine news mixed in with pandemic realities, analysts said.

Gold prices tumbled on Monday amid more risk-on sentiment and a rebound in the U.S. dollar. December Comex gold futures last traded at $1,831.50, down 2.18% on the day. The move comes after AstraZeneca and the University of Oxford said their COVID-19 vaccine was up to 90% effective.

Critical data this week will be the Fed's minutes from the November meeting, which are scheduled to be published on Wednesday. Markets are eyeing any change in wording amid rising expectations that the central bank might introduce some changes at its upcoming December meeting, said TD Securities on Monday.

"The market will be looking for any discussions on conditions for extending the weighted average maturity of Treasury purchases. We are expecting the Fed to use this dimension of QE to ease, which could put a halt to the massive wave of ETF outflows from gold," TD Securities strategists said.

Any changes to the asset purchase program are essential to keep an eye on, said FXTM chief market strategist Hussein Sayed. "The Fed may increase its quantity of purchased Treasury bonds, currently at $80 billion a month, and even extend the duration of bonds bought to longer-term maturities. While this may ensure that borrowing costs remain in check, again, it is fiscal support that's needed to prevent another steep decline in growth," Sayed said.

There is also a feeling that the Fed is becoming more concerned with lack of fiscal stimulus, said BBH Global Currency Strategy. "It's becoming more likely that QE composition will be tweaked next month to help push long yields lower. Ahead of the minutes, Barkin, Daly, and Evans speak Monday, followed by Bullard and Williams Tuesday," BBH wrote.

A slate of positive vaccine news has been weighing on gold. Still, a reversal in safe-haven flows is "misguided," TD Securities pointed out.

"We reiterate that the reversal in safe-haven flows behind the ETF holdings is misguided — the vaccine will ultimately be a boon for gold bugs," TD's strategists said. "Under the Fed's Flexible Average Inflation Targeting regime, officials will attempt to stimulate an inflation overshoot which could last years, rather than months. In this context, the vaccine should help foster higher inflation expectations associated with a firmer recovery down the road, while leaving nominal rates broadly unchanged."

For the rest of 2020, investors will be torn between vaccine hopes and rising record coronavirus cases, said Sayed.

"With eight days to go until the end of the month, November has already added about a quarter of all U.S. Covid-19 cases since the beginning of the pandemic. The number of daily new cases is rising rapidly, and the percentage of positive tests in most U.S. states is above the recommended 5% threshold. The healthcare system is under severe stress with at least 83,000 hospitalized Covid-19 patients, and the number continues to go higher," he noted.

In the meantime, the risk-on sentiment is on the rise, with the Bank of America monthly survey reporting that cash levels in portfolios dropped to 4.1% — the lowest level since January.

What investors need to keep in mind going forward is that most of the positive vaccine news has already been priced in. However, bad economic data is still coming.

"Whether the vaccine rally resumes in the upcoming weeks or takes a pause remains unknown. However, a lot of the positive news is already priced in, and we are yet to see the economic damage caused by the Covid-19 second or third waves. Fiscal and monetary policy should continue to play a significant role in preventing a double-dip recession, and investors will monitor those policymakers' actions very closely until we are confident the economy can run on its own without support," Sayed noted.

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