(Kitco News) There is fear in the marketplace, with many analysts citing the still raging COVID-19 pandemic, deteriorating U.S. economic conditions, and a possible delay of the $1.9-trillion stimulus proposed by the U.S. President-elect Joe Biden.
“The short-term economic perspective still looks troubling. People are getting scared, and they are raising cash. The market remains vulnerable,” said Kitco Metals global trading director Peter Hug.
Economic data point to a significant slowdown at the beginning of the new year as more lockdown measures are introduced, weighing on the economic recovery.
“Not surprising to see retail falling again due to virus numbers and restrictions being imposed across the country. It looks like consumption growth slowed pretty sharply at the end of last year. And it sets things up for a weak start to this year,” Capital Economics U.S. economist Andrew Hunter said on Friday.
This uncertainty is triggering a selloff in gold and equities as people turn to cash amid higher U.S. dollar and rising yields, said Hug.
On top of bad economic data, markets are dealing with higher U.S. dollar and rising yields, said Blue Line Futures chief market strategist Phillip Streible. “The dollar index is pushing up, yields are going higher. People are panicking,” he said.
Right now, the market is concerned about the higher dollar, which is capping gold, said RJO Futures senior commodities broker Daniel Pavilonis. “Technical analysis is that we could have another washout, and it’ll be a great buying opportunity.”
At the time of writing, February Comex gold futures were trading at $1,825.50, down 1.40% on the day.
Markets’ reaction to Biden’s $1.9-trillion proposal, unveiled on Thursday, was a negative one, said analysts.
“Biden’s proposal of $1.9 trillion is going to help, but again it is a little down the road. He first will need to come into the office and get the stimulus passed through the House and the Senate. At the same time, he is potentially going to try to impeach Trump. It will get messy,” said Hug.
Part of the question is how quickly will Biden be able to pass his proposed stimulus, Hug noted. “He will get resistance from the Senate because a big chunk of the money is going to the states, and that has been a sticking point for Republicans in the past,” he added.
It would take just a few Republicans to say no to really prolong this process, noted Pavilonis. “Markets reactions to Biden’s proposal have been negative. Yields popped, the dollar got stronger, stocks sold off, metals sold off. This could be a preemptive look at what will happen,” Pavilonis said. “Economic plan from Biden went from promising $2,000 checks down to $1,400.”
Next week, markets will begin to focus on what Biden can achieve during his first weeks in office. “What is he capable of achieving given the impeachment trial? If stimulus gets delayed because of impeachment, it could create an issue for equities and generate more uncertainty and create more movement into cash,” Hug said.
The inflationary theme cannot be ignored this year, Walsh Trading co-director Sean Lusk reminded investors. “With the Democratic Congress and Biden, the government will not stop at $1.9 trillion, which will be a strain on the balance sheets. We might have further weakness in equities.”
Bonds and yields are starting to forecast higher inflation because of money printing, added Pavilonis. “The market is concerned about money printing. Fed’s inflation has been low for many years. If we finally hit 2%, it could be one of those situations that they can’t control it. It will be good for gold,” he explained.
Fed Chair Jerome Powell addressed inflation during a live event at the Princeton University Bendheim Center for Finance on Thursday, stating that the central bank hasn’t tied itself to any particular mathematical formula when it comes to its new average inflation targeting. He also noted that “too-low inflation is much more dangerous.”
Powell pointed out that in the near-term, inflation could start to accelerate. “As the pandemic recedes and we see a strong wave of spending, we could see upward pressure on prices. But the real question is how large will that effect be and will it be persistent,” he said.
One issue Powell has alluded to is the expectation that the headlined and core inflation will rebound sharply over the next few months due to a major price drop last year, Hunter said.
“Fed is going to look through that. But there are a lot of reasons apart from that to expect underlying inflation to pick up this year and recover a lot quicker than in prior recessions,” he stated. “Goods inventories are still low, we saw upward pressure on goods prices and services. And considering demand will rebound strongly this year, it is not hard to see inflation pick up.”
On the radar next week
Biden’s inauguration on Wednesday, which could be accompanied by civil unrest, and Trump’s impeachment trial are the two main political events to watch next week.
Chances of civil unrest are low, according to analysts, who do not see it significant impacting gold next week.
“Washington will very much be the focus of the world’s attention this coming week as Joe Biden is inaugurated as the 46th U.S. President on Wednesday. It would seem unlikely that we see a repeat of the civil unrest witnessed on Capitol Hill, but progress on impeachment proceedings may pre-occupy the Senate at a time when the U.S. economy looks like it needs more support,” warned ING FX strategists.
Another event to keep an eye on is Janet Yellen’s confirmation hearing as the U.S. Treasury Secretary on Tuesday. Markets will be looking for a possible comment on the U.S. dollar.
Also on the radar next week are central bank decisions from the European Central Bank, Bank of Canada, Bank of Japan, and Norway’s central bank.
On the data front, U.S. housing will take center-stage with building permits and housing starts scheduled for Thursday and existing home sales for Friday.
More weakness in gold is possible next week in light of the crowded long gold trade, said T.D. Securities commodity strategist Daniel Ghali.
“In the near term, the balance of risk is to the downside as gold is transitioning back into the safe-haven trade. Gold positioning has been complacent. And the crowded long trade is facing its largest challenge. In terms of positioning squeeze, we could see prices challenged here,” he said.
The $1,775 is the level to watch on the downside if gold breaks out of its wider $1,800-$1,900 trading range, Ghali added.
Hug said he is looking for $1,825 to hold next week. “In 2021, once Biden gets in and money starts to flow, I am very constructive the metals. If $1,825 is lost, next support is $1,800, and if we lose that, we move down to the $1,775 range, which is the primary line in the sand.”
The $1,800 level should be a good support level next week, highlighted Pavilonis. If the market closes below $1,800, then $1,750-60 would come into play. “But I think we’ll hold here. I don’t see the stock market having a washout effect. Stocks are inverse to the dollar right now. It looks like it will be a choppy-sideways environment that will ultimately be supportive for the metals,” he said.
Lusk sees longer-term dips being bought after some major unwind from long positions on Friday. “We talked about $1,820-$1,800. That would be 5% lower on the year. But, I don’t see a further uptick in the dollar further out.”