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Gold Prices May Fall as Virus Cases Rise With Risks of Staggered Reopening

Gold Prices May Fall as Virus Cases Rise With Risks of Staggered Reopening

Dimitri Zabelin, Analyst
Gold Chart

Source: IG Charts

OUTLOOK: BEARISH

  • Gold prices may fall with stock markets as Covid-19 cases rise in the US
  • Staggered reopening of the economy risks derailing recovery in inflation
  • XAU/USD could also suffer if jobless claims statistics show another spike

Gold Prices May Suffer if Reopening is Delayed

Gold prices may come under fire if efforts to gradually reopen the economy are derailed amid concerns that doing so could undermine public health. Policymakers have attempted to navigate this labyrinth and balance economic integrity without increasing the rate of infection. A tilt toward easing lockdown measures opens the door to a spike of infections and the prospect of a delayed reopening of the economy.

Confirmed Covid-19 Cases: Global, US, Spain, Italy, Brazil and UK, S&P 500, Gold Prices – Daily Chart

Confirmed covid-19 cases

XAU/USD chart created using TradingView

Having said that, Treasury Secretary Steven Mnuchin last week said: “We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage”. Consequently, it appears that this leaves the decision of reopening in the hands of local lawmakers. Several states have already reported a spike in coronavirus cases with growing concerns that it could lead to an extended lockdown.

Initially, gold prices rallied after they bottomed out with stocks on the expectations that the fiscal stimulus measures and aggressive Fed easing would go hand-in-hand with an uptick in economic activity and inflation. However, if hopes for a speedy recovery are dashed and sentiment sours, the appeal of gold as a hedge against price growth in this environment may wane relative to its comparatively more liquid counterpart: the USD.

Gold prices and bloomberg correlation-weighted currency index

Powell Testimony May Hurt XAU/USD, FOMC Recap

This week, Federal Reserve Chairman Jerome Powell will be giving two congressional testimonies. The first part of the two-part semi-annual monetary policy report will be to the Senate Banking Committee, and the second to the House Financial Services Committee. Investors will be carefully tuning into the hearings to hear Mr. Powell’s commentary and outlook for economic activity and financial stability amid the pandemic.

However, markets have already gotten a taste of the central bank’s position last week following the FOMC rate decision. While the Chairman assured investors that the Fed will use the widest set of tools at their disposal to combat the economic fallout, he warned that the full picture for unemployment data is far from complete. You can read more about his comments here.

US Retail Sales May be Overwhelmed by Jobless Data

XAU/USD may also find itself caught in the middle of conflicting reports. On the one hand, analysts are expecting for US retail sales data for May to jump from their prior, record-low print at -16.2% to 3.9%. The sign of economic improvement could push gold prices higher. On the other hand, initial jobless claims data will likely show another increase of unemployed persons.

While the jobs report in May was viewed by many as stellar, its success can be deconstructed by the very notion that the statistics were not necessarily indicative of job creation so much as reclamation. To quote Mr. Powell, it’s a “long” road ahead for the labor market, and unexpected statistics could introduce additional uncertainty and volatility into an already-unpredictable backdrop. Gold may not thrive in this environment.

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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