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Gold: Back to $2,000?

Dec 3, 2020

Gold is trying to put a troubling month behind it as it claws back its losses from November. As US fiscal stimulus talks restart, so inflation expectations have risen rapidly this week to levels not seen since the start of 2019. Can gold reclaim the magical $,2000 level once more?

Risk-hungry investors

The skid for gold since the US election comes on the back of the increased likelihood for a robust global economic recovery. The Pfizer and BioNTech vaccine kicked off a dash to risky assets as investors have piled into equities, and commodities like oil and copper. The prospects of vaccinations have been further boosted by the UK’s approval for emergency use, with an emboldened bullish market now looking firmly beyond the winter covid infections and lockdowns.

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Dollar weakness

In normal times, the strength of the dollar goes a long way to determining which way gold trades. A falling greenback makes the precious metal cheaper in other currencies which draws in net buyers, especially those who believe massive US monetary stimulus undermines the dollar.

Gold prices initially continued to fall through last month while the dollar and real interest rates, those adjusted for inflation, remain relatively unmoved. But having been hit three times by vaccine news through November, investors have pushed the dollar though long held technical levels. This has seen buyers purchase gold on the view that weakness in the dollar will persist.

Upcoming market events

The Federal Reserve meeting in a couple of weeks will have a big say in what happens to the dollar and rates. The key question for gold is whether the market can count on the Fed doing more? Increased easing is expected which should ultimately help gold bugs as expectations for inflation grow, while rates are kept on the floor.

A bumper fiscal package could be in the pipeline, especially if the Democrats can gain control of both Houses by winning the state of Georgia. New Treasury Secretary Janet Yellen will also be looking for outsized fiscal support as she aims to return employment levels to pre-Covid level as quickly as possible.

How big will the economic rebound be?

A recovering global economy helped by vaccine rollouts means there is less need to hedging risk and less need to buy gold. Ultimately the yellow metal trades on the interplay between interest rates and inflation.

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