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James Hyerczyk
Comex Gold

Gold posted a volatile, two-sided trade last week before buyers took over to solidify a third week of gains. Gold rallied to a new contract high early in the week as new coronavirus infections fueled worries about the global economic recovery, however, prices broke as a drop in demand for risky assets drove investors into the safety of the U.S. Dollar. On Friday, however, gold rebounded as record virus infections in the U.S. drove equity prices lower.

Last week, August Comex gold settled at $1780.30, up $27.30 or +1.56%.

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More Stimulus on the Way?

The headlines may have said gold was up on safe-haven buying driven by a surge in COVID-19 infections, but that wasn’t the case per se. In my opinion, gold rallied because investors began to price in another round of fresh fiscal stimulus from governments and additional monetary stimulus form the major central banks. There were no major announcements regarding these factors so we have to chalk up the rally to aggressive speculators.

Although there have been discussions about additional fiscal stimulus in the U.S., policymakers seem to be taking a “wait and see” approach to determine whether additional aid is needed. The relentless spread of the coronavirus, however, is likely to speed up the process of providing additional aid to those who need it, especially if there is another round of restrictions and lockdowns.

As far as monetary stimulus is concerned, well that’s up to the Federal Reserve. The Fed has committed to do whatever it takes to save the economy, but it is also looking at the data. This week’s U.S. Non-Farm Payrolls report could prompt policymakers to take some kind of emergency action if the numbers come in worse than expected. Furthermore, the Fed could also make a pre-emptive strike if it reads into the coronavirus numbers and feels the economy is getting ready to turn South in a hurry.

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Traders Watching US-China Trade Relations

Gold traders are also monitoring U.S.-China trade relations especially as it comes to the Phase One trade deal after the U.S. Senate unanimously passed a new bill that places sanctions on Chinese officials and businesses who undermine Hong Kong’s autonomy from Beijing.

In response to this move by U.S. lawmakers, Chinese officials expressed “strong dissatisfaction” with U.S. sanctions that came in response to a new national security bill on Hong Kong, warning that crossing “red lines” and meddling in what China considers its own internal affairs could put the trade deal at risk, The Wall Street Journal first reported on Friday.

Weekly Forecast

A bullish trade in gold this week is not cut and dry. In fact, it could get a little tricky. Some traders feel that most of the fiscal and monetary stimulus is already priced in and that gold will have some trouble sustaining a rally over $1800.00.

Gold could also break along with the stock market if liquidity becomes an issue. If stocks fall, gold traders may be encouraged to sell pieces of their long positions to cover losses or meet margin calls. We saw this move in March.

Furthermore, if liquidity becomes an issue then investors could start buying the U.S. Dollar again and this could put demand pressure on dollar-denominated gold.

The bottom line:  Be careful chasing gold prices higher.

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

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