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Whoa! Tuesday November 24 wasn’t too good for gold. The price of the yellow metal then plummeted from $ 1,840 to $ 1,800. In fact, November was a terrible month for gold prices, which fell from a local high of $ 1,941, or more than 7%.
So what happened? Well, it seems that the positive news of the vaccines has eliminated the risk of negative tail linked to the pandemic. Consequently, the demand for gold as a safe haven refused . On the other hand, the price of Bitcoin has risen recently as investors have increased their risk appetite. Furthermore, the election results also reduced market uncertainty. In other words, the economic outlook is improving as the clouds of uncertainty begin to clear.
Indeed, President-elect Joe Biden this week announced the initiation of a formal transition of power from the Trump administration to his own. Biden also began announcing appointments for the top positions, which served to reduce the risk a disputed election had to uncertainty among investors.
Notably, there are rumors that Biden may tap former Fed chief Janet Yellen to become the next Treasury secretary. Investors know and trust her, so they welcomed the possibility of her nomination for a key position in the new administration. Indeed, Yellen is well known and respected, despite having the knowledge and skills necessary for the position (although she has more experience in monetary policy than in fiscal policy).
Additionally, Yellen, who is seen as an accommodating person, is believed to be in favor of more government economic aid in order to stimulate the economy and recover quickly from the coronavirus crisis. In fact, it has long called for an increase in public spending to combat the recession and has always been concerned about labor markets, low participation rates and high unemployment. Additionally, like the former Fed chief, Yellen will work closely with the US central bank and listen to the Fed’s requests for a fiscal package. Therefore, it will help support high public spending to ensure that the labor market is recovering.
Implications for gold
What does all this mean for the gold market? Well, the recent dip in the gold market is worrying. Some declines are perfectly understandable as uncertainty related to both the pandemic and the elections has decreased. However, the divergence between stocks and gold in their reaction to a greater likelihood of greater economic stimulus is bad news for the precious metals market. The return to normal in the market and the consequent strengthening of risk appetite could make gold struggle for a while , especially if real interest rates rise.
You see, the coronavirus crisis has been very deep but short-lived and the return to normal must come sooner than it did after the Great Recession. However, I don’t think we will have a 2013 replay yet. Risk appetite has increased, but monetary and fiscal policies are still far from normalization. There is, of course, the risk of an interest rate hike, but the Fed will actively seek to suppress interest rates as long as it does not see more than two percent inflation.
However, the long-term fundamentals have not changed significantly. Real interest rates actually remain well below zero while the US dollar remains weak. These factors should support gold prices and the expansion of public debt should also help the yellow metal. Investors should also not forget the possibility of a debt crisis or the risk of accelerating inflation when the epidemic ends and people ramp up their spending.
In other words, the current fiscal and monetary stimulus should support or even push up gold prices over the medium to long term. It is possible that, faced with the lack of a fiscal package, the Fed will introduce some changes at its next meeting in December to keep real interest rates at ultra low levels and to stimulate the economy.
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For a look at all of today’s economic events, check out ours economic calendar.
Arkadiusz Sieron, PhD
Profits of the sun: analysis. Care. Profits.
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