Can the price of gold drop below $ 1,700 before the selloff is over? Markets eye restrictions COVID, stimulus

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(Kitco News) Gold has been down for the third straight week, but does that mean the bull market is over? Some analysts are starting to reverse their expectations of $ 2,000 in gold by the end of the year.

On Friday, light Christmas trading and stop losses contributed to gold’s movement below $ 1,800 an ounce.

And while analysts remain confident that the macro environment is still very favorable for gold to rise, some are starting to postpone expectations of new record prices to next year.

“I disagree with the premise that gold was recovering from the pandemic. I think gold was recovering from the pandemic response. The stimulus package, the devaluation of the US dollar, the lows interest rates – these are the reasons gold has bounced back to new records. I don’t think any of those reasons have faded, “Phoenix Futures and Options LLC president Kevin Grady told Kitco News.

However, Grady no longer expects $ 2,000 worth of gold by the end of this year, estimating the precious metal will hit 2020 below $ 1,900 an ounce.

The drivers that pushed gold to new highs in August are still very much present, said Daniel Ghali, commodity strategist at TD Securities.

“One way to see this is to see what drives people to buy or sell gold. When we analyze it, it boils down to factors that we can actually see in real time. Things like the US dollar, real rates, nominal rates, etc.”, Ghali said. “The gold price action right now is totally inconsistent with what is happening in those other markets. And what it tells us is that it is overwhelmingly driven by the positioning changes. Most likely, what happened. is that gold prices surpassed an was essentially the greatest pain that some market participants could endure. “

Analysts warned investors last week to expect more volatility due to thin holiday trading, and this is what the gold market has seen. At the time of writing, December gold futures were trading at $ 1,782.70, down 1.26% over the day.

“This week saw a rollover period. Wednesday was the index’s last roll day, which means it was the last day for anyone with a long December contract to liquidate those positions or roll those positions. That’s what happened with the selloff at the beginning of the week. It gave people a chance to get out of the trade and reevaluate, ”Grady said.

The traders who came in late and were chasing the market higher are the ones exiting now, Walsh Trading co-director Sean Lusk said.

“What we’re seeing here are the ones that came out first, which means the audience probably chased this $ 1,920 thing. The lineup was pretty steep, so the breakup had to be serious,” Lusk said.

Also, a lot of attention has been taken from the crypto space and it has also damaged the gold, Grady added. “Some money came out valuable and went into cryptocurrency,” he said.

Lusk also noted that many people are starting to prefer cryptocurrencies over gold. “But at the end of the day, what would you rather have an ounce of gold in your hand or something like that on screen?” churches.

Eyes on COVID, stimulus, Fed restrictions

In the weeks leading up to the Christmas holidays, market focus will shift to how severe the COVID-19 restrictions will be, whether there is any further stimulus this year, and what more the Federal Reserve can do to help, analysts say. .

“Market sentiment is more likely to be affected by news about a vaccine timing and concerns about a near-term escalation of Covid containment measures in the wake of Thanksgiving rallies,” ING chief international economist James Knightley said. . “The number of cases was soaring before last week, but vacation travel and socialization could see an acceleration that requires aggressive action to prevent health systems from collapsing under the pressure of admissions.”

These new restrictions could harm the economic recovery, which is far from stable, Knightley said. “We can already see the labor market is suffering as curfews and restrictions come into effect in more parts of the United States.”

Markets are likely to still see problems with the distribution of COVID-19 vaccines as the second wave persists, Lusk added. “There is real potential that this could still hinder this resumption of action outside the political situation,” he noted.

With no stimulus yet in sight, the big question for gold is whether or not the market can rely on the Fed to do more in December, Ghali said.

“More specifically, the change in weighted average maturity that some of the market expects. This was the focus of the Fed minutes and will likely be the focus of the mid-December FOMC meeting. This is ultimately what will determine whether or now the Gold prices will resume their upward trajectory in the near future, “he noted.

What’s next?

In terms of how to trade gold from here, Grady said to keep an eye on $ 1.851 as a bullish level and then sell that level the first time gold reaches it. “This was our old low that we broke,” he said.

Lusk, on the other hand, isn’t ruling out further losses next week before gold starts to recover. “If this market can push down another $ 60- $ 70, we could see a move below $ 1,700 before it ends,” he said.

After that, Lusk expects gold to start rising in 2021, noting that late December and early January are seasonally good times for gold.

“We will go from Mnuchin to Yellen, who just got out of Bernanke’s school of quantitative easing and money printing. You can look for continuous dips to get bought,” he said. “Seasonally, from November to mid-December, we see seasonal weakness. The market was lagging here. I am looking for support levels to maintain and then buy into 2021.

Data to keep an eye on

Next week’s data list is complete, including key US nonfarm employment data for November, scheduled for Friday.

There is also the PCE Price Index and Pending Home Sales Monday, the ISM Manufacturing PMI on Tuesday, the ADP Non-Farm Employment and Factory Orders Wednesday, and the ISM Non-Manufacturing PMI and Unemployment Claims Thursday.