Gold - Medium Term Outlook

By: Asad Rizvi

November 01, 2020 (MLN): GOLD @ $ 1878 = The US Elections have already begun. After the Aug 06 plunge from the highs of $ 2085, gold struggled to make gains. It briefly surpassed $ 2000 on Aug 12, but the rally fizzled out.

The big question is that globally Coronavirus outbreak is once again surging and lockdown has started. Unlike 6-8months ago, this time despite passing the USD 2.2 trillion bill, US stimulus talks have failed. It is not known if the relief bill will be passed before the Presidential in January or not. How will gold react to the ongoing developments ?

It's important to keep a track of liquidity injection, as the size of stimulus was huge to clean the monster bubble. Size of fiscal support was USD 12 trillion and the injection through monetary support was USD 7.5 trillion.  

Until the announcement of new stimulus, gold has little to cheer about. Only big supportive factor for Gold that I see is a possible clash over US Election results. This could be the major driver.

However, I am expecting a delay in the result announcement, which should also support gold, but a hint of win for Biden could see some more correction. Delay in the stimulus package has already halted the upside rally and the upside rally could be delayed. It does not mean stable conditions, as the market will remain choppy.  

CONCLUSION

The key support level on the downside is around USD 1810-20, which in my view, if seen, is the buying levels. $1770-80 should hold or I do not rule out a test of $ 1680-1710 zones, which is less likely to happen.

Only an upside break of $ 2090 will encourage a rally towards USD 2192 zones, though not a favorable move in this calendar year unless there is severe unrest or an emergency package is announced. Next major upside resistance level is around $ 2350-80 zones.  

Further, in my view for the sharp up move to test new highs, the US economic stimulus package is a prerequisite factor due to cash squeeze caused by negative to lower global growth projection.

Softer oil prices are not helping the cause either and are a major hindering factor stopping the gold upside rally. A 25% decline in daily oil consumption from previous years demand means the global banking/financial system is being deprived of nearly $ 100 billion cash on monthly basis, as oil settlement is mostly on cash basis. This is why USD SWAP CREDIT LINE FACILITY is a very common friendly tool designed to only accommodate/assist advance economies that also helps CB's to keep sufficient cash in hand. Hence, Central Banks (CBs) may not be keen to further increase its gold portfolio, as in past several months CBs have already created new record by printing of notes.

(The writer is former Country Treasurer of Chase Manhattan Bank)

Disclaimer: The opinions in this article are the author’s and do not necessarily represent the views of Mettis Link News (MLN)

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