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(Kitco News) There is fear in the market, with many analysts citing the still-violent COVID-19 pandemic, deteriorating US economic conditions and a possible delay in the $ 1.9 trillion stimulus proposed by US President-elect Joe Biden.
“The short-term economic outlook still looks worrying. People are getting scared and they are raising money. The market remains vulnerable,” said Peter Hug, director of global trade at Kitco Metals.
Economic data point to a significant slowdown at the beginning of the new year as more blocking measures are introduced, weighing on the economic recovery.
“It is not surprising to see retailers falling again due to the number of viruses and restrictions imposed across the country. It seems that consumption growth has slowed down a lot at the end of last year. And that sets things up for a weak start to the year,” he said. American economist capital economist Andrew Hunter said on Friday.
That uncertainty is triggering a sale of gold and stocks as people seek money amid rising dollar and rising earnings, Hug said.
In addition to the bad economic data, markets are dealing with the higher US dollar and rising yields, said Blue Line Futures chief market strategist Phillip Streible. “The dollar index is going up, yields are going up. People are panicking,” he said.
At the moment, the market is concerned about the rising dollar, which is limiting gold, said RJO Futures senior commodities broker Daniel Pavilonis. “The technical analysis is that we may have another failure and it will be a great buying opportunity.”
At the time of writing, February’s Comex gold futures were trading at $ 1,825.50, down 1.40% on the day.
Biden’s stimulus
Markets’ reaction to Biden’s $ 1.9 trillion proposal, revealed on Thursday, was negative, analysts said.
“Biden’s $ 1.9 trillion proposal will help, but again, it’s a little bit further. He will first need to get into office and get the stimulus passed in the House and Senate. At the same time, he is potentially going to try to accuse Trump. It’s going to be a mess, “said Hug.
Part of the question is how quickly Biden will be able to pass the proposed stimulus, Hug noted. “He will have resistance from the Senate because a large part of the money is going to the states, and that has been an obstacle for Republicans in the past,” he added.
It would take only a few Republicans to say no to really prolong this process, Pavilonis noted. “The market’s reactions to Biden’s proposal were negative. Yields skyrocketed, the dollar grew stronger, stocks were sold, metals were sold. This could be a preventive view of what will happen,” said Pavilonis. “Biden’s economic plan went from the $ 2,000 check promise to $ 1,400.”
Next week, markets will begin to focus on what Biden can achieve during his first few weeks in office. “What is he able to achieve with the impeachment trial? If the stimulus is postponed because of impeachment, it could create a problem for stocks and generate more uncertainty and create more cash movement,” said Hug.
Inflation history
The inflationary issue cannot be ignored this year, Sean Lusk, co-director of Walsh Trading, reminded investors. “With the Democratic Congress and Biden, the government will not stop at $ 1.9 trillion, which will put pressure on the balance sheets. We may have more weakness in the shares.”
Bonds and yields are starting to predict higher inflation because of printing money, added Pavilonis. “The market is concerned with printing money. Fed inflation has been low for many years. If we finally reach 2%, it could be one of those situations that they cannot control. It will be good for gold, ”he explained. .
Fed Chairman Jerome Powell addressed inflation during a live event at Princeton University’s Bendheim Center for Finance on Thursday, declaring that the central bank has not tied itself to any specific mathematical formula when it comes to its new average inflation target. He also noted that “very low inflation is much more dangerous”.
Powell pointed out that, in the short term, inflation may start to accelerate. “As the pandemic recedes and we see a strong wave of spending, we can see upward pressure on prices. But the real question is how big this effect will be and will be persistent,” he said.
One issue that Powell alluded to is the expectation that headline and core inflation will recover sharply in the coming months due to a big price drop last year, Hunter said.
“The Fed is going to look at that. But there are many reasons beyond that to expect underlying inflation to recover this year and recover much faster than in previous recessions,” he said. “Stocks of goods are still low, we have seen upward pressure on the prices of goods and services. And considering that demand will recover strongly this year, it is not difficult to see inflation rising.”
On the radar next week
Biden’s inauguration on Wednesday, which may be accompanied by civil unrest, and Trump’s impeachment trial are the two main political events to be observed next week.
The chances of civil unrest are low, according to analysts, who see no significant impact on gold in the coming week.
“Washington will be the focus of the world’s attention next week, as Joe Biden is sworn in as 46th President of the United States on Wednesday. It seems unlikely that we will see a repeat of the civil unrest witnessed on Capitol Hill, but progress on impeachment procedures can occupy the Senate at a time when the US economy appears to need more support, “warned ING FX strategists.
Another event to keep an eye on is Janet Yellen’s confirmation hearing as U.S. Treasury secretary on Tuesday. Markets will be looking for a possible comment on the US dollar.
Also on the radar next week are the decisions of the central bank of the European Central Bank, Bank of Canada, Bank of Japan and central bank of Norway.
In terms of data, housing in the U.S. will take center stage, with building permits and openings scheduled for Thursday and sales of existing homes for Friday.
Price levels
More weakness in gold is possible next week due to the crowded bought gold trade, said TD Securities commodities strategist Daniel Ghali.
“In the short term, the balance of risk is negative, as gold is returning to safe-haven trade. The positioning of gold has been complacent. And crowded bought trade is facing its biggest challenge. In terms of tightening positioning, we could see prices challenged here, “he said.
The $ 1,775 is the level to watch for on the downside if gold moves out of its broader trading range of $ 1,800 to $ 1,900, added Ghali.
Hug said he expects $ 1,825 to hold next week. “In 2021, as soon as Biden enters and the money starts to flow, I’m very constructive with metals. If $ 1,825 is lost, the next support will be $ 1,800, and if we lose that, we will go down to the $ 1,775 range, which is the main line in the sand. “
The $ 1,800 level is expected to be a good level of support next week, Pavilonis said. If the market closes below $ 1,800, then $ 1,750-60 would come into play. “But I think we can handle it here. I don’t see the stock market having a faded effect. Stocks are reversed to the dollar now. It looks like it will be an unstable environment that will turn out to be favorable for metals,” he said.
Lusk sees long-term declines being bought after a big drop in long positions on Friday. “We talked about $ 1,820- $ 1,800. That would be 5% lower for the year. But, I don’t see an additional increase in the dollar.”
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