Bullion traders need to wait for prolonged consolidation
Posted on Jan 23, 2021 at 12:00 am
Gold traders that were hoping for a boost in prices following President Biden's election have been unruly disappointed. Biden's plan to introduce spending of $1.9 trillion, a figure that amounts to 9.1% of US 2020 GDP, appears to have been priced into gold prices and did not deliver a much-needed boost to the yellow metal.
But for now, inflation expectations remain low, whilst US bond yields have risen sharply. This means that the real yield has risen in the USA, which tends to hurt gold prices. The US ten-year government bond yield has increased from 0.49% in August 2020 to 1.08% on January 22, and from a technical point of view, it would not be surprising, if we could see the yield reach 1.31%. Also, weighing heavy on gold prices is the sharp rise in stock markets. Few people would like to hold an asset like gold that does not pay a yield when they could buy a stock with dividend yield, or a share in a company set to benefits from the reopening of the economy following the pandemic.
President Joe Biden has been calling for unity and urgent support to the economy. His inauguration speech and actions since taking office have convinced investors that there is a growing chance that Congress approves – at least a large part of his proposed $1.9 trillion stimulus bill to support the economy. Treasury Secretary nominee Janet Yellen also called for going "big".
Gold has risen in response to higher prospects of more money flooding the world – potentially funded by debt, as taxes seem to have slipped off the agenda. However, concerns about a Republican pushback have limited gold's gains. Coronavirus cases have continued rising worldwide, supporting the case for more government funds. Several European countries have extended their restrictions and the UK, unfortunately, recorded a death toll described by Prime Minister Boris Johnson as "appalling. In the US, there is no relenting, with mortalities surpassing the 400,000 mark.
The European Central Bank left its policy unchanged and initially hinted it could cut its bond-buying scheme. However, ECB President Christine Lagarde later stressed that the bank remains flexible on the topic. Overall, the ongoing flow of funds has been keeping Gold underpinned.
While Federal Reserve Chair Jerome Powell put an end to talk about tapering down the bank's largesse, he has yet to open the door to expanding the scheme fully. Any clue about purchasing more debt would be music to gold bulls' ears. The other top events on the economic While Federal Reserve Chair Jerome Powell put an end to talk about tapering down the bank's largesse, he has yet to open the door to expanding the scheme fully. Any clue about purchasing more debt would be music to gold bulls' ears. The other top events on the economic calendar are US Durable Goods Orders for December and Gross Domestic Product. Signs of economic weakness may prompt lawmakers and the Fed to act. The consensus is for around 4.4% growth in the fourth quarter, but recent consumption figures have been disappointing.
Gold is at crossroads – rising gradually from the lows but has yet to move higher. All in all, the picture is mixed. The current convergence may eventually give way to a robust directional trade, but it is unclear which direction.
Gold faces resistance at Rs 51000, which was a peak in December. It is followed by Rs 51500, another high point last month, and then by Rs 52000, which was a peak in November and then nearly reached again.