Gold Price Coils Up Ahead of Election on Improved Sentiment, Weaker USD

GOLD PRICE OUTLOOK:

• Gold prices climbed for a third day to US$ 1,890 as traders counted down to the election
• The precious metal price was buoyed by improved market sentiment and a weaker US Dollar
• 81% of the retail gold traders (within IG)are net long gold, in anticipation for a Democratic sweep

Gold prices rebounded from a key support level of US$ 1,870 amid favorable market sentiment as traders counted down to the US election. As recent polls have suggested, many are anticipating a potential “Blue Wave” - a Democratic sweep – election outcome, which is likely to support risk assets and sink the US Dollar. If Biden wins, the Democrats may be empowered to push through a larger fiscal bill at the expense of a wider deficit, which may lead the US Dollar to fall. With a new Covid-19 viral wave hitting the US and most parts of the EU, a massive relief packages seems needed to cushion the pandemic’s impact.

In view of a historic negative correlation between gold and the US Dollar (chart below), a “Biden-win” scenario will likely sink the US Dollar and buoy the precious metal prices. The opposite is true if Trump beats Biden – a less likely outcome that may result in a stronger US Dollar and weaker gold prices.

Source: Bloomberg, DailyFX

The medium-term outlook, however, appears biased towards the upside as global central banks continue to expand their balance sheet. Systemically important central banks, including the Fed, ECB, RBA and BoE, may lean toward the dovish side against the backdrop a slower pace of economic growth in Q4 as a second Covid-19 viral wave hits the US and the EU. Ample liquidity and an ultra-low interest rate environment could stay with us for a longer period of time, which may provide support to precious metal prices.

The Federal Reserve balance sheet hit a record high of US$ 7.177 trillion in late October, and the trend showed no sign of reversing any time soon (chart below).

Source: Bloomberg, DailyFX

Technically, gold prices came off the all-time high (US$ 2,075) in early August and have since entered a three-month pullback. Prices are consolidating within a tight range between US$ 1,870 to $1,930 in the past four weeks (highlighted in chart below). An immediate support level can be found at US$ 1,870 (the 76.4% Fibonacci retracement), breaking below which may open room for further losses with an eye on US$ 1,810.

The overall trend appeared to be bearish-biased, with a “Death Cross” likely formed recently. The 20- and 50-Day Simple Moving Average (SMA) lines have crossed below the 100-Day SMA, signaling that downward pressure might be prevailing. Immediate resistance levels can be found at US$ 1,898 (20-Day SMA), US$ 1,910 (61.8% Fibonacci retracement) and then US$ 1,930 (upper ceiling of the range).

Gold Price – Daily Chart

IG Client Sentiment indicates that retail gold traders are leaning heavily towards the long side, with 81% of positions net long, while 19% are net short. Traders have trimmed long (-2%) positions and added short (+16%) bets overnight. Compared to a week ago, traders have reduced both long (-3%) and short (-10%) exposure.

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter