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James Hyerczyk
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Gold

Gold futures are edging higher on Thursday, supported by a weaker U.S. Dollar on extremely low holiday volume. Gains are likely being capped by the lack of major players in the market, but primarily by a slight rise in demand for riskier assets.

At 09:26 GMT, February Comex gold futures are trading $1881.90, up $3.80 or +0.20%.

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Gold may actually be in a sweet spot on the daily chart – between the 50% and 61.8% levels of its November to December trading range.

Helping to underpin prices are an accommodative Fed and hopes for additional fiscal stimulus next year after President-elect Joe Biden takes office on January 20. Keeping a lid on gains, however, are worries that a successful launch of coronavirus vaccines will put the global economy on a faster track toward recovery.

With the recent Fed pledge to keep interest rates low until the economy is ready and new stimulus from the U.S. government earlier this week, gold traders seem ready to move on to the next set of events that could launch another short-term rally before Biden takes office.

This week, traders were introduced to a new strain of coronavirus that could derail the economic recovery by offsetting the impact of the vaccine. This would increase the need for further stimulus, which would provide additional support for gold.

Also providing support for gold is the news that Britain and the European Union were on the cusp of striking a narrow trade deal. If accomplished then traders expect the British Pound and Euro to be lifted, which would put further pressure on the U.S. Dollar. A weak dollar will be good for dollar-denominated gold because it would drive up foreign demand for the asset.

Although gold is likely to remain supported by monetary and fiscal stimulus, and a weaker dollar, it could face headwinds from other assets like stocks and Bitcoin. These investments are competing for the same U.S. Dollars being dumped onto the market.

Gold could rally, but the move could be labored and not look anything like the move we saw earlier in the year. If the dollar continues to weaken, the new money hitting the market will seek the best return. Since gold doesn’t pay a dividend or interest, it could struggle when competing against other assets that provide a yield like Treasurys and stocks.

Finally, don’t even think about buying gold for its so-called “safe-haven” appeal. This year served as proof that gold is not the “go to” safe-haven. That position has been taken over by the U.S. Dollar, Treasurys and the Japanese Yen.

After the initial rally earlier in the year, gold gave back 50% of the rally and is currently hovering just above this level. That’s hardly the characteristic of a safe-haven asset especially in the wake of the surge in COVID-19 cases and deaths.

For a look at all of today’s economic events, check out our economic calendar.
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