Gold Fundamental Outlook: Bearish
- Gold prices could fall if lockdown policies hurt economic growth and inflation prospects
- Ongoing US fiscal stimulus talks adding additional uncertainty to US political landscape
- First vice presidential debate may push XAU/USD higher if Kamala Harris outperforms
Coronavirus Spike Pressuring Lawmakers to Extend or Reimpose Lockdowns
Coronavirus cases continue to rise not only in the United States – the epicenter of Covid-19 – but also around the world, prompting governments to reimpose or extend economically-crippling lockdown policies. While economic data and financial markets swiftly recovered after both cratered in March, the initial rally appears to now be fizzling out as the effects of the stimulus measures that arguably propelled it to these levels wane.
Covid-19 cases now stand at a little over 1 million, and protestors are starting to erupt. This is not only due to social turbulence – e.g. race relations, a topic of the first US presidential debate – but also from citizens who oppose extended and stricter shelter-in-place orders. Measures that contain the virus may come at the cost of revived economic activity, risking an extended and bumpy recovery.
Inflation expectations are reflecting a more pessimistic view of price growth after surging from March through late-July/early-August. Not entirely by coincidence, gold – an anti-fiat hedge – also spiked in part from expectations of rising price growth but also from a weaker US Dollar. However, with this dynamic now wilting, demand for the precious metal may be substituted for highly-liquid havens like the Greenback.
Fiscal Stimulus Stalemate May Rattle Confidence
Another factor that may cause investors to scuttle away from gold and into caves of comparatively less-risky assets is the ongoing statement between Republicans and Democrats over another stimulus package. The cost of the negative externality of bipartisan intransigence is being incurred by investors and economists who fear that without additional aid, economic activity may sharply contract.
Democrats are looking to put through a $2.2 trillion stimulus package with some provisions to make it palatable for their colleagues across the aisle. Having said that, reconciling the Trump administration’s stance on not going above approximately $1.6t for another stimulus package may be a stalling point that spoils risk appetite. In that scenario, gold prices may retreat if risk aversion ensues.
Vice Presidential Debate May Catalyze Market Volatility
Market volatility may also be amplified by uncertainty about the outcome of the first vice presidential debate on October 7. Senator Kamala Harris will be going up against Trump’s vice Mike Pence with Washington Bureau Chief for USA Today Susan Page as the moderator of the debate.
If the outcome of the debate swings more in Ms. Harris’ favor, based on previous analysis, it could help lift market mood if it increases Biden’s popularity. In the coming weeks, political uncertainty as it relates to the 2020 election may continue to weigh on sentiment, potentially endangering gold prices from retesting their all-time high at 2075.14.
--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter
