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(Kitco News) There is fear in the marketplace and many analysts cite the still raging COVID-19 pandemic, worsening US economic conditions and a possible slowdown in the $ 1.9 trillion stimulus measure proposed by US President-elect Joe Biden.
“The short term economic outlook still looks troubling. People get scared and raise money. The market remains fragile,” said Peter Hug, Kitco Metals’ director, global trading.
Economic data points to a significant slowdown at the start of the new year as more lockdown measures are introduced, weighing on the economic recovery.
“Unsurprisingly, retail sales are declining again due to virus numbers and restrictions imposed across the country. It appears that consumption growth slowed quite a bit late last year. And it makes things good for a weak start to this year.” , said Capital Economy The US economist Andrew Hunter said Friday.
This uncertainty is leading to a sell-off in gold and stocks as people turn to cash amid a higher US dollar and rising yields, Hug said.
In addition to bad economic data, markets are facing a higher US dollar and rising returns, said Phillip Streible, chief market strategist at Blue Line Futures. “The dollar index is rising, interest rates are rising. People are panicking,” he said.
Right now, the market is concerned about the higher dollar hedging gold, said Daniel Pavilonis, senior commodity broker at RJO Futures. “Technical analysis is that we may have one more washout, and it will be a great buying opportunity.”
At the time of writing, February Comex gold futures were trading at $ 1,825.50, down 1.40% on a day.
Biden’s incentive
The markets’ reaction to Biden’s $ 1.9 trillion proposal, revealed Thursday, has been negative, analysts said.
Biden’s $ 1.9 trillion proposal will help, but again, it’s a bit down the road. He will have to get into the office first and let the stimulus go through the House and Senate. At the same time, he’s potentially going to try Trump. It’s going to be messy, “Hug said.
Part of the question is how quickly Biden will be able to pass on his proposed stimulus, Hug noted. He will face resistance from the Senate because a lot of the money is going to the United States, and that has been a sticking point for Republicans in the past, ”he added.
It only takes a few Republicans to say no to really extend this process, Pavilonis noted. “The markets’ reaction to Biden’s proposal was negative. Revenues fell, the dollar strengthened, stocks sold, metals sold. This could be a preemptive look at what will happen,” Pavilonis said. “Biden’s economic plan went from promising $ 2,000 checks to $ 1,400.”
Next week, markets will begin to focus on what Biden can achieve during his first weeks in office. “What can he accomplish in view of the impeachment process? If the incentive is delayed due to impeachment, it could create a problem for stocks and create more uncertainty and generate more cash flow,” said Hug.
Inflation story
The inflationary theme cannot be ignored this year, Sean Lusk, co-director of Walsh Trading, reminded investors. “With the Democratic Congress and Biden, the government is not going to stop at $ 1.9 trillion, which will be a strain on balance sheets. We may have even more weakness in stocks.”
Bonds and yields are beginning to predict higher inflation due to money printing, Pavilonis added. “The market is worried about money printing. The Fed’s inflation has been low for many years. If we eventually hit 2%, it could be one of those situations that they have no control over. It will be good for gold. ”he explains. .
Fed Chairman Jerome Powell discussed inflation at a live event at the Princeton University Bendheim Center for Finance on Thursday, stating that the central bank has not committed itself to any particular mathematical formula when it comes to its new average inflation targets. He also noted that “too low an inflation rate is much more dangerous.”
Powell pointed out that inflation could accelerate in the near term. “With the pandemic coming down and we see a strong spending wave, we can see upward pressure on prices. But the real question is how big that effect will be and whether it will last,” he said.
One issue that Powell has alluded to is the expectation that headliner and core inflation will pick up sharply in the coming months as a result of a major price drop last year, Hunter said.
“The Fed is going to look through that. But there are many other reasons to expect underlying inflation to pick up this year and recover much faster than in previous recessions,” he said. “Goods stocks are still low, we saw upward pressure on goods prices and services. And as demand will pick up strongly this year, it is not difficult to see inflation picking up.”
On the radar next week
Biden’s inauguration on Wednesday, which could be accompanied by civil unrest, and Trump’s impeachment process are the two main political events to watch next week.
The likelihood of public unrest is low, according to analysts who see no significant impact on gold next week.
Washington will be very much the world’s attention over the next week as Joe Biden is inaugurated on Wednesday as the 46th president of the US. It seems unlikely we will see a repeat of the civil unrest on Capitol Hill, but progress on the ground impeachment proceedings may 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 out for is Janet Yellen’s hearing as Secretary of the US Treasury on Tuesday. Markets will be on the lookout for a possible comment on the US dollar.
Also on the radar next week are decisions by the central bank of the European Central Bank, Bank of Canada, Bank of Japan and the central bank of Norway.
As for the data, US homes will take center stage with building permits and housing starts scheduled for Thursday and existing home sales for Friday.
Price levels
More weakness in gold may be coming next week in light of the overcrowded long gold trade, TD Securities commodity strategist Daniel Ghali said.
“In the short term, the risk ratio is on the downside as gold returns to the safe haven. Gold positioning has been complacent. And overcrowded long trade faces the biggest challenge. Could see prices challenged here,” he said.
The $ 1,775 is the level to be viewed negatively if gold breaks out of its broader trading range of $ 1,800 – $ 1,900, Ghali added.
Hug said he is looking for $ 1,825 for next week. “In 2021, once Biden steps in and the money starts to flow, I am very constructive about the metals. If $ 1,825 is lost, the next support will be $ 1,800, and if we lose that, we will go back to the $ 1,775 range. , which is the primary line in the sand. “
The USD 1,800 level should be a good support level next week, Pavilonis emphasized. If the market closes below $ 1,800, $ 1,750-60 will come into play. “But I think we’re going to hold out here. I don’t see the stock market having a fallout effect. Stocks are upside down against the dollar right now. Looks like it’s going to be a choppy sideways environment that will eventually hit the metals,” said he.
Lusk sees long-term dips buying after a significant run-off of long positions on Friday. “We were talking about $ 1,820 – $ 1,800. That would be 5% lower compared to the year. But otherwise, I don’t see any further appreciation in the dollar.”
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