Gold prices inched higher on Tuesday as the dollar weakened, though the start of COVID-19 vaccinations in the United States and Canada buoyed hopes of a swifter global economic recovery and kept the metal’s gains in check.
“A slight softening of the U.S. dollar more than accounts for the minor lift in gold,” said Michael McCarthy, chief strategist at CMC Markets, adding that market participants were looking to the U.S. Federal Reserve meeting as the next impetus.
The dollar hovered near a more than two-and-a-half-year low, hurt by progress on a fiscal coronavirus relief bill as lawmakers appeared optimistic over a deal split into two parts in an effort to win approval.
Capping bullion’s gains, coronavirus vaccinations in the United States began on Monday with a New York City intensive care unit nurse becoming the first to receive the vaccine.
“We’re at peak vaccine optimism at the moment ... so even without further developments, it’s possible sentiment could pull back and that could be supportive of gold,” McCarthy added.
Meanwhile, COVID-19 infections continued to surge globally, prompting tighter restrictions and lockdowns in the Netherlands, Germany and London, while deaths crossed 300,000 in the United States.
Investors now await policy meetings of the Fed starting on Tuesday and the Bank of England on Thursday.
With the roll-out of vaccines, central bankers may re-evaluate their policies and enact stimulus programmes with a less sense of urgency going forward, Avtar Sandu, a senior commodities manager at Phillip Futures, said in a note.
But ultra-low yields and negative real interest rates are expected to remain supportive of gold, he added.
Gold to trade near $1,900 in 2021, price risk is to the downside, says Capital Economics
Capital Economics has released its outlook for next year, in which it sees gold trading at $1,900 an ounce with a risk of more selling.
Capital Economics describes its outlook as positive but highlights some key downside risks, including quicker-than-expected economic recovery.
"We expect that the price of gold will trade at around $1,900 per ounce through 2021 as U.S. real yields remain low. That said, we recognize that there are some key downside risks to our forecast. U.S. nominal yields could surge and investors could intensify their selling of safe-haven assets, perhaps because of a faster-than-expected revival in U.S. economic activity," wrote Capital Economics assistant commodities economist Samuel Burman.
There are two main downside risks to Capital Economics' $1,900 gold forecast. The first is the possibility that the U.S. real yields rise once nominal yields pick up due to a quicker-than-anticipated economic rebound. Capital Economics is currently projecting for the world GDP to grow by 6.8% in 2021.
"The market currently expects U.S. interest rates to remain near zero at least until 2023, but this could be brought forward if inflation persistently overshoots its 2% target and if the unemployment rate falls quickly," Burman said.
The second downside risk is lower investor demand for gold in the new year. "Investors could intensify their selling of safe-haven assets, such as gold-backed ETFs," Burman wrote.
As risk-on sentiment rises, investor demand falls. November alone saw the second-largest outflow in gold-backed ETFs on record, according to the World Gold Council (WGC).
However, even in light of these risks, Burman offered some consolation, saying that any price declines in gold should be limited.
· Gold Price Analysis: XAU/USD moves back above $1840 level, two-day tops
Gold added to its intraday gains and climbed to fresh daily tops, around the $1843 region during the early European session.
The precious metal caught some fresh bids on Tuesday and built on the previous day's late bounce from near two-week lows, around the $1818 region. The continuous surge in new coronavirus cases overshadowed the recent optimism over the rollout of vaccines for the highly contagious disease, which, in turn, benefitted the commodity's safe-haven status.
Apart from this, hopes for additional US fiscal stimulus measures extended some additional support to the non-yielding yellow metal and remained supportive. Meanwhile, a subdued US dollar price action did little to influence the dollar-denominated commodity or hinder the intraday positive move, with bulls looking to build on the strength beyond 200-hour SMA.
That said, the upside is likely to remain capped near the $1848-50 region as investors might refrain from placing aggressive bets ahead of a two-day FOMC monetary policy meeting, starting this Tuesday. Hence, any subsequent move up runs the risk of fizzling out rather quickly and warrants some caution before positioning for any further appreciating move.
Market participants now look forward to the US economic docket – featuring the second-tier releases of the Empire State Manufacturing Index and Industrial Production data. This, along with the US stimulus headlines, might influence the USD price dynamics. Traders might further take cues from developments surrounding the coronavirus saga and the broader market risk sentiment.
Reference: Reuters, Kitco, FXSrteet
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