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LAWRIE WILLIAMS:: Has gold price meltdown been too far, too fast?

Gold investors will hardly be unaware that the gold price now is well over $200 below the level it rose to as recently as early August.  Since then, contrary to most projections including our own, price progression has largely been downhill.  We had assumed that the likely result of the U.S. Presidential election would favour gold in anticipation of a Biden victory and, perhaps, the Democrats gaining a majority in the Senate.

While Joe Biden does appear to have won the Presidential race, the Trump rearguard action in disputing the results in the courts, and his continuing reluctance to concede defeat, has opened up a degree of uncertainty here, while the Senate make-up still looks like favouring the Republicans.  There have also been a couple of other developments that have fuelled euphoria in the equities markets, and been counter-productive for the risk element that might otherwise have favoured gold and the yellow metal has dipped in price accordingly.

We see none of the above having a long term negative impact on the likely path of the gold price once the U.S. Thanksgiving holiday is behind us. Or perhaps the true likely recovery in the gold price may well have to wait for the New Year by when the current negative factors for gold could have dissipated.  Until then any market action is likely to remain muted, although there will be occasional ups and downs largely dependent on eventual finalisation of the U.S. Presidential contretemps and global geopolitical events.

I am also told by one of my readers in the U.S. that today is gold option expiration day and the rolling over of current options into futures contracts can create anomalies in the market due to margin calls on unexpired options.  It would seem that vaccine optimists may be getting out of gold in the expectation that economic growth may start to return to normal once a mass vaccination programme is implemented.  However, as we note below, hopes of a speedy vaccine rollout and a rapid return to anywhere near normality may still be months, if not years, away yet and once this realisation sinks in the effects on equities (negative) and gold (positive) could well begin to influence the overall picture,

It currently seems likely that Joe Biden will be confirmed as the 46th U.S. President. However U.S. coronavirus infections and deaths will likely continue at huge levels = there were nearly 2,200 U.S. COVID-related deaths recorded yesterday for example – figures that may well be exacerbated by new transmissions occurring over the Thanksgiving holiday. As a result, we would suggest that a Biden administration may have a better chance of pushing higher stimulus give-aways through the House and the Senate, even if the latter remains just in a Republican majority.  There has to be the possibility that Republican Senators from particularly badly-affected States may break ranks in their opposition to the bigger Democrat-proposed economic stimulus measures in the interests of their own electorates – particularly if the Trump-inspired hugely partisan political divide mellows even just a little.

Continuing virus spread plus higher economic stimulus measures could well be gold positive, particularly when it becomes apparent that any vaccine roll-out is likely to be far slower, and possibly less-effective, than the market optimists are banking on.   Another gold positive factor has to be the decline in the dollar index to below 92 today.  So far gold has not reacted strongly but that could well be because the financial sector is already winding down for the Thanksgiving holiday.  There could be some fireworks next week once business is fully resumed – however we think that any gold price recovery, if this happens, is more likely to be slow and steady.

Meanwhile today is a very busy day for U.S. economic data, which could move the markets. According to kitco.com, data due for release today includes an estimate of third-quarter GDP, advance economic indicators, durable goods orders, the weekly jobless claims report, personal income and outlays, new residential sales, weekly MBA mortgage applications, the University of Michigan consumer sentiment survey, the FOMC minutes, and the weekly DOE liquid energy stocks report.  Any of these data points could have a gold price impact.

Overall we now see gold largely marking time for the remainder of the current year, with any movement in the yellow metals’ price likely to be marginally positive.  However we do see the price moving upwards again from the beginning of 2021.  The recent downturn may thus have been overdone – as these things frequently are, but often any recovery tends to be slower than market conditions should justify.  Gold owners should probably hold the faith!.

25 Nov 2020 | Categories: Gold

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