Biden stimulus, weak dollar, political turmoil to spur gold
While a second Covid-19 wave across Europe is raising concerns about demand, trade data showed that China is continuing to recover
The gold market started the week on solid footing with modest gains, and oil advanced near $38 a barrel on Monday as President-elect Joe Biden prepared to navigate America's pandemic-hit economy out of crisis.
December gold futures last traded at $1,955.40 an ounce, up 0.19 per cent on the day amid a broader rally in global stocks. Crude futures in New York rose 2.3 per cent as dollar extended declines.
According to commodity pundits, two factors will continue to support gold prices. First, a Biden presidency - even with a divided Congress as Republicans look to control the Senate and Democrats hold on to the House - is expected to lead to more stimulus measures. The second factor is that the ongoing political turmoil will boost gold's safe-haven demand.
They pointed out that both factors will also continue to weigh on the greenback as it hovers near a two-month low. Analysts have said that the dollar will be essential to gold's future path, higher or lower.
Analysts said although Biden promised swift action against the pandemic and an orderly transfer of power during his victory speech over the weekend, the president-elect inherits a divided country and an economy ravaged by the coronavirus as infections race toward 10 million. While a second Covid-19 wave across Europe is raising concerns about demand, trade data showed that China is continuing to recover.
"Expectations of a more predictable and steady incoming Biden administration and the hopes of an additional stimulus package are pushing the prices of oil higher along with gold," a senior commodities analyst at VI Investment Corp., said.
Precious metal analysts also expect economic uncertainty to weigh on the dollar and provide renewed support for gold. They expect that the pandemic will weigh on economic growth heading into the New Year.
Ehsan Khoman, head of Mena Research and Strategy, MUFG Bank, said the Biden victory could pull forward dollar weakness. "Beyond the premise that Biden will advocate higher corporate taxes, our premise for believing that the dollar will weaken in the months ahead is based on the critical role the US Federal Reserve will play going forward. The implications of the Mena region, particularly the GCC states which all [excluding Kuwait] peg their currencies to the dollar, will be positive once the ramifications of the virus ebb away. This is primarily as a weaker currency benefits sectors such as travel and tourism which have been heavily impacted from pandemic-related mobility restrictions, offsetting the increase in the cost of imports [and inflation] for the region," said Khoman.
Ole Hansen, head of commodities strategy at Saxo Bank, said that with the expected political gridlock on Capitol Hill, markets will start to look to the Fed for more leadership on the economy.
"Any new stimulus measure from the Fed is going to drive gold prices higher," he said. "This seems like the catalyst that could push gold prices to $2,000 an ounce by the end of the year.
Marc Chandler, managing director at Bannockburn Global Forex, was quoted in a report as saying that although gold broke above a significant downtrend line, its push back to all-time highs remains allusive. "Gold is not quite off-to-the-races and a re-challenge of $2000. First, it must overcome the $1962 area, which is the halfway mark of the decline from the early August record high and then the (61.8 per cent) retracement near $1989."
In oil markets, a Biden presidency could prove to be a short-term catalyst for higher oil prices (even under a Republican controlled Senate), given the accelerated push towards clean energy. It will lead to a higher marginal cost of shale supply with investors less willing to fund exploration and development.
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