The gold market is likely seeing some pullback after recent gains as the yellow metal gears up for another run towards fresh all-time highs. The metal has traded largely sideways for a few weeks now, and the longer it moves sideways the more significant the next leg higher could potentially be.
It is difficult, if even possible, to come up with any bearish issues for the gold market and the metal is likely to continue to be bought aggressively on any dips in price that do develop. The Fed’s recent decision to allow inflation to run above its desired 2% target means that interest rates will stay low for some time to come. This ultra-low interest rate environment is bullish for gold, which tends to outperform as rates decrease.
The stock market could hold the key to the yellow metal’s next rally. Stocks have been strong in recent action as investors have become increasingly dependent on central bank action to keep equities on the offensive. Despite the Federal Reserve holding rates at zero and pumping the economy full of liquidity through QE, however, a day may come when investors recognize and acknowledge the difficulties being faced by the global economy. This recognition could potentially lead to a major pullback in equity markets, which currently sit near all-time highs. Such a pullback in stocks could send additional capital flowing into the gold market and other asset classes and could lead to fresh all-time highs for the yellow metal.
The Federal Reserve’s actions could keep ongoing pressure on the U.S. Dollar as well. The dollar index has struggled to maintain any upside above the 93 level, and the euro could have further room to run higher against the greenback. A weaker dollar index could keep buying pressure in gold elevated, as the weaker currency makes gold less expensive for foreign buyers.
The combination of a slowing global economy, weaker dollar, accommodative Federal Reserve and uncertainty over the upcoming U.S. Presidential election may all keep the yellow metal rising while limiting any downside dips in price. The gold bulls are in control of the market on the daily chart, with an uptrend still in place that has lasted the last five months or so. The bulls will target the September highs near $2000 per ounce, while the bears are likely to target support at $1900 per ounce.
Despite all the bullish issues backing the gold market currently, there are some other factors that could lead to a pullback or even reversal in trend. Hopes for a COVID-19 vaccine have intensified in recent days and have fueled the stock market’s upside. If a vaccine is developed and is brought to market, it could potentially provide a shock-and- awe effect on global markets that would likely send stocks higher and safe haven asset classes lower.
The major theme for the week is the U.S. Federal Reserve meeting set to conclude on Wednesday afternoon. The announcement on rates will be followed by a press conference with Fed Chief Jerome Powell who may provide additional clues on the central bank’s plans and thinking.