After an impressive run, gold hit the skids and shows no signs of taking off again. The gold price has been under pressure for weeks, although it rallied on Tuesday, climbing back above $1,800 an ounce after falling into the $1,700 range.
However, Tuesday’s rally may only be a temporary reprieve.
Pressure on the Gold Price
Gold has been pressured by a number of positive news items in recent weeks, including the news about Pfizer’s (NYSE:PFE) and Moderna’s (NASDAQ:MRNA) Covid-19 vaccine candidates, which could start being distributed by the end of the month. Analysts disagree about the long-term effect of the vaccine news on the gold price.
For example, Societe Generale analysts said in a recent report that the Covid-19 vaccines are bearish for the yellow metal in the long term. They warned that the vaccine news could significantly reduce safe-haven flows into gold. The initial report about the first vaccine sent the gold price plunging $100 an ounce in a single day.
On the other hand, OANDA analyst Edward Moya believes the news about the vaccines is heavily priced in already and should no longer be the main bearish catalyst for the precious metal. He predicts that there might not be much resistance in the gold price until it reaches about $1,850 an ounce.
Looking for a Return to Normalcy
The news about the vaccine has been negative for gold because it represents light at the end of tunnel and the possibility that the global economy could get back to normal soon. However, when distribution of the Covid-19 vaccines begins, it will still be a while before things start to get back to normal.
Although Societe Generale analysts noted that a return to normalcy would be bearish for gold, they put that timeframe out to 2022. They see upside for gold through at least the first half of 2021.
Their upside scenario for gold, which is the downside economic scenario, puts the yellow metal up to $2,340 an ounce by the first quarter. Their downside scenario for gold, which is the upside economic scenario, puts the precious metal’s price down to $1,800 an ounce for the first quarter.
Despite Societe Generale’s argument that a return to normalcy would be bearish for gold, there is one other factor to keep in mind, and that’s inflation. The massive amounts of monetary stimulus that have been poured into the economy will have to result in inflation at some point. This is most likely to happen once the economic recovery is underway. Inflation is good for gold, so that offers the potential for continued support for the yellow metal even after things start to get back to normal.
Positives for Gold Still in Place
Despite the pressure from such news headlines, other positives for gold remain in place. Outgoing Federal Reserve Chairman Jerome Powell said this week that the economic outlook right now is “extraordinarily uncertain.” He remains concerned about the economic recovery, which demonstrates that the macroeconomic backdrop for gold remains positive despite the recent plunge in gold prices.
Powell and Treasury Secretary Steven Mnuchin appeared together before the Senate Banking Committee on Tuesday. Both supported the rollout of additional fiscal stimulus to support the economy. More stimulus would be good for stocks, although it could also be good for gold. Any signs that the economic recovery is sputtering should be a positive for the yellow metal.
More stimulus likely means a weaker dollar, which is also good for gold. The U.S. dollar fell to its lowest level in more than two years on Tuesday, driven by another round of stimulus talks between Mnuchin and House Speaker Nancy Pelosi. News about a bipartisan stimulus bill that would provide $908 billion in funding especially weighed on the dollar.
Where Will Gold Go from Here?
If the dollar continues to struggle, gold could find support. The gold price hit some resistance at around $1,832. The next key level to watch will be $1,800 to see if it finds support at that level.
FX Empire noted that gold broke above its 200-day exponential moving average on Tuesday. Further, $1,800 was a key area of breakout in the past, so it could serve as a major level of support in the near term.
FX Street suggests that the next key support level could actually be at $1,813, which is where the Fibonacci 23.6% one-month level converges with the Fibonacci 38.2% one-week level.
Additionally, the site sees a soft resistance level at $1,825 and a slightly harder resistance level at $1,836. Looking even higher, FX Street sees an upside target of $1,842, which is where the Fibonacci 38.2% one-month level lies.
Downside for gold appears limited right now, but news about the Covid-19 vaccines could place a ceiling on the price as well. Various positive and negative factors for gold are in a delicate balance right now, so it depends on which factor ends up being the biggest catalyst for the price. Signs of a weak economic recovery could give the yellow metal a boost, but much of the economic data we’ve seen in recent weeks has been mixed.
Looking Into the Long Term
It wouldn’t be surprising if trading action on gold is choppy in the near term due to the mix of factors we’re seeing right now. However, if we look further out, much is going to depend on the recovery and how quickly the world’s economy normalizes.
The markets could be overestimating the effects of a coronavirus vaccine for the near to intermediate term because it will take some time before doses of the vaccine can be distributed to everyone who wants to be vaccinated. It isn’t like flipping a switch on the economy, although the markets are treating the vaccine news as such. It could be the middle of next year before things can really get back to normal because it could take that long to distribute the vaccine widely. In fact, it looks like the vaccine rally could already be slowing down.
Going into 2021, it appears that the path of least resistance is upward, although that doesn’t mean we won’t face a bumpy road in getting there.
On the date of publication, Jacob Wolinsky did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Jacob Wolinsky is the founder and CEO of ValueWalk. What started as a hobby ten years ago, has turned into a well known financial media empire with millions of monthly visitors focusing in particular on simplifying the opaque world of hedge fund world. Before doing ValueWalk full time, he worked as an equity analyst first at a micro-cap focused private equity firm, as well as an analyst at a small/mid-cap value-focused research shop. After that, he worked in business development for hedge funds.