The gold market has maintained strength, despite a recent pullback in price, and appears to be getting ready for another run to the upside. The yellow metal has several important issues currently working in its favor, including unlimited quantitative easing measures and the potential for a sharply slower economy as the COVID-19 pandemic rages on.
The gold market does appear to be getting quite comfortable above the psychologically important $2000 per ounce level, and it may simply be a short period of time and consolidation before the bulls stage another rapid run to the upside.
The weaker U.S. Dollar has been a primary catalyst for higher gold prices and could continue to serve as a key driver of investor demand. On Tuesday, the dollar traded down to a two-year low. The dollar’s weakness has been attributed to a few factors, but lower bond yields are likely the main catalyst for greenback downside. The U.S. Dollar index is getting dangerously close to falling below support levels. A decline below the May 2018 low around 92.24 could see the currency fall further, possibly reaching a swing low around the April 2018 low at 89.22.
Not only does the U.S. currency have to deal with ultra-low interest rates and unlimited quantitative easing, it must also deal with ongoing delays on the passage of additional U.S. stimulus measures. Delays to further stimulus could set the stage for a significantly slower third quarter in U.S. economic activity, and that weakness could keep downside pressure on the greenback.
As the dollar weakens, gold may also be seeing benefit from rising tensions between the U.S. and China, who happen to be the globe’s first and second-largest economies. The ongoing Coronavirus crisis has led to anger and distrust between the two superpowers and could even lead to a complete halt to trading negotiations. If talks were to be discontinued, the global stock market could potentially see significant selling, like what was seen months ago as COVID fears took hold, and gold could rise as additional investors seek out its perceived safety.
As if COVID-19, a slowing global economy and a worsening of U.S. and Chinese relations were not enough, the U.S. also has an upcoming presidential election that could send markets into a tailspin. It has been suggested by some that if democratic candidate Joe Biden were to win the presidency, stock markets could see a massive potential sell-off as investors look to go risk-off. It has also been suggested that a Trump victory could set the stage for fresh all-time highs in equities, despite the effects of the global pandemic. What many likely fear the most, however, is the uncertainty that could arrive with an election result that is contested. If Trump refuses to leave office, for example, the unknowns could fuel a sharp and significant decline in equity and risk asset prices. Much of that equity could, however, find its way into the yellow metal, driving prices further into all-time high territory.