After the tragic sell-off of gold, the bulls staged a Jedi rebound. Can gold prices reverse the decline?

January 18 - As the new crown epidemic is still raging, the US economy is deteriorating, and the US$1.9 trillion stimulus plan proposed by US President-elect Biden may be delayed. Market fears are heating up. This uncertainty has triggered a dump of gold and stocks to cash. The future trend of gold still needs to pay attention to Biden's actions after taking office and changes in inflation.

As the new crown epidemic is still raging, the US economy is deteriorating, and the US$1.9 trillion stimulus plan proposed by US President-elect Biden may be delayed. Market fears are heating up. This uncertainty has triggered a dump of gold and stocks to cash. Spot gold fell to around 1805 in Asia on Monday (January 18), but it has now recovered to around 1827.87, basically recovering all the declines. The future trend of gold still needs to pay attention to Biden's actions after taking office and changes in inflation.

After the tragic sell-off of gold, the bulls staged a Jedi rebound. Can gold prices reverse the decline?

Market fears heat up, investors turn to cash

Said Peter Hug, Global Trading Director of Kitco Metals. "The short-term economic outlook still looks worrying. People are beginning to be scared and they are starting to raise funds. The market is still fragile."

Economic data shows that with the introduction of more blockade measures, economic growth at the beginning of the new year will slow down significantly, putting pressure on economic recovery.

According to Andrew Hunter, US economist at Capital Economics. It is not surprising that the retail industry has fallen again due to the number of viruses and restrictions imposed across the country. At the end of 2020, consumption growth appears to have slowed sharply.

Hunter said this uncertainty has triggered a sell-off in gold and stocks as people turn to cash as the dollar rises and yields rise.

Phillip Streble, chief market strategist at Blue Line Futures, said that in addition to poor economic data, the market is also facing the issue of a rising dollar and rising yields. The U.S. dollar index is rising, and so are yields. People are panicking.

Daniel Pavilonis, senior commodity broker at RJO Futures, said that the current market is concerned about the dollar's rise, which limits the price of gold. Technical analysis shows that we may encounter a consumption again, which will be a good buying opportunity.

As of this writing, the February gold futures price on the New York Mercantile Exchange was $1827.8 per ounce, down 0.11% on the day.

Biden stimulus bill has negative feedback

Analysts said the market reacted negatively to Biden's $1.9 trillion plan announced on Thursday.

Hug said, “Biden’s $1.9 trillion plan is helpful, but it’s still a bit behind. He first needs to be stationed in the White House and pass a stimulus plan in the Senate and House of Representatives. At the same time, he may also try The impeachment of Trump will make the situation more confusing. The stimulus plan may be delayed due to the resistance of the Senate, because avoiding the flow of large sums of money to the states has been a major sticking point of the Republican Party’s rule."

Pavilonis pointed out that it only takes a few Republicans to refuse to really extend the process. The market reacted negatively to Biden's proposal. Yields have soared, the dollar has strengthened, and stocks and metals have been sold off. This may be an investor's anticipation of future trends. Biden's economic plan has also fallen from the promised $2,000 to $1,400.

Hug said that this week, the market will begin to pay attention to what Biden can achieve in the first few weeks of his tenure. Regarding the impeachment trial, what can he do? If the stimulus plan is delayed due to impeachment, it may cause problems for the stock market, create more uncertainty, and lead to more capital flows.

Rising inflation may benefit gold

Walsh Trading co-director Sean Lusk (Sean Lusk) reminded investors that the theme of inflation in 2021 cannot be ignored. With Biden and the Democratic-controlled Congress, government stimulus measures will not stop at $1.9 trillion, which will bring debt pressure. The stock market may weaken further.

Pavilonis added that due to the "water release"bonds and yields are beginning to expect inflation to rise. The Fed’s inflation rate has been low for many years. If we eventually reach 2%, this may be one of the circumstances beyond their control. This is good for gold.

Fed Chairman Jerome Powell talked about inflation at a live event at the Bendheim Financial Center of Princeton University last Thursday . He said that the Fed did not set specific standards when setting a new average inflation target. He also pointed out that “low inflation is much more dangerous.”

Powell pointed out that in the short term, inflation may begin to accelerate. As the epidemic subsides, there will be a strong wave of consumption, and we may see pressure from rising prices. But the real question is how big this impact will be and will it last?

One problem Powell mentioned is that due to the sharp decline in prices in 2020, the headline and core inflation rates will rebound sharply in the coming months. Hunter said: "The Fed will see through this. But in addition, there are many reasons for us to expect that this year's potential inflation will accelerate, and the recovery speed will be much faster than previous recessions. Commodity inventories are still low, we see As commodity prices and services face upward pressure. Considering that demand will rebound strongly in 2021, it is not difficult for inflation to rise. "

Need to pay attention this week

Biden's inauguration on Wednesday and Trump's impeachment trial are two major political events worthy of attention this week, which may be accompanied by domestic unrest.

Analysts believe that the possibility of domestic unrest is very low, and they believe that it will not have a significant impact on the price of gold this week.

This week, Biden will be sworn in as the 46th President of the United States on Wednesday, when Washington will become the focus of the world's attention. A foreign exchange strategist at ING warned: “The recurrence of the civil unrest witnessed by the US Congress is unlikely to happen, but at a time when the US economy seems to need more support, the progress of the impeachment process may disturb the Senate.”

Another event worthy of attention is the confirmation hearing of Janet Yellen’s inauguration as the Secretary of the Treasury on Tuesday. The market will pay attention to his comments on the dollar.

The European Central Bank (ECB), the Bank of Canada, the Bank of Japan and the Bank of Norway will also make interest rate decisions this week.

In terms of data, the US housing market will be the focus. Building permits and housing starts will be announced on Thursday, and existing home sales data will be announced on Friday.

Price level

Daniel Ghali, commodity strategist at TD Securities, said that the price of gold may weaken further this week due to the intensive long trading of gold. He said, “In the short term, the balance of risks is downwards because gold is reverting to safe-haven trading. Gold’s positioning is too complacent. And crowded long trading is facing the biggest challenge. In terms of position squeeze, we may We will see the price challenged. If the price of gold breaks through the $1800-1900 trading range, $1775 will be a downside level worth watching."

Hug said he hopes the $1,825 position will provide enough support this week. Once Biden takes office, funds will begin to flow. If it falls to $1825, the next support level is $1800. If it falls to this support level, it will reach the $1775 range, which is the main benchmark for the broader market.

Pavilonis emphasized that this week, the $1800 level should be a good support level. If the market closes below $1800, then $1750-60 will play a supporting role. However, he believes that the decline will not extend to this range. I don't think the stock market will squeeze gold prices. Currently, the stock market is moving opposite to the dollar. It seems that this will create a range-bound environment that will eventually support metal prices.

Lusk believes that the market will buy a longer-term decline after a substantial liquidation from a long position last Friday. The decline ranged from $1820 to $1800. However, it is difficult for the dollar to rise again later.

After the tragic sell-off of gold, the bulls staged a Jedi rebound. Can gold prices reverse the decline?

(Spot gold daily chart)