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James Hyerczyk
Comex Gold

Gold futures posted their steepest contraction since August last week as a rising U.S. Dollar dampened foreign demand for the dollar-denominated asset, however, losses were limited late in the week as hopes for more U.S. stimulus measures resurfaced. Sellers were in control four out of five sessions, losing more than $20 a day in three out of those four.

Last week, December Comex gold futures settled at $1866.30, down $95.80 or -4.88%.

The week started with gold slumping over 3% on Monday, sliding to its lowest level in more than a month, as a broader market sell-off driven by uncertainty over more U.S. fiscal stimulus pressured the precious metals complex along with a stronger U.S. Dollar. Basically, when stocks plunged, investors used their holdings in gold to pay for margin calls and to cover losses.

Outside Influences Weigh on Gold

Gold has pared gains since hitting a record peak in August as the U.S. Congress for weeks remained deadlocked over the size and shape of its next coronavirus response bill.

But things got a little more complicated last week following the death of Justice Ruth Bader Ginsburg on September 18. Expectations are that the death of Bader will create additional division between the Democrats and the Republicans, which would mean a smaller chance of a stimulus plan coming soon.

Gold did find some support late in the week after House Democrats put together another coronavirus stimulus plan, which would cost about $2.4 trillion. There were also reports that the House could get together this week to vote on the legislation. This news was enough to put in a bottom on Thursday, but not bullish enough to fuel a short-covering rally.

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Weekly Forecast

Gold probably collapsed more than it should have last week because stubborn bulls just wouldn’t let go of the asset at higher prices when they had a chance. Many investors were thinking that gold should be higher on safe-haven demand, but as they found out the hard way, gold is an investment, and not a true safe-haven like the U.S. Dollar, Treasury bonds or Japanese Yen, and they paid the price.

Rocky economic reports aside, in watching last week’s price action, I observed that gold is being more responsive to talk of fresh stimulus measures rather than the economic reports. The Fed even brought up the need for more fiscal stimulus, and of course, we all saw the reactions on Thursday and Friday to the possibility of a stimulus vote this week.

Federal Reserve Chairman Jerome Powell urged Congress last week to provide the U.S. economy with more fiscal support to combat the coronavirus pandemic’s ongoing impact.

“Many borrowers will benefit from these programs, as will the overall economy,” Powell said. “But for others, a loan that could be difficult to repay might not be the answer, and in these cases, direct fiscal support may be needed.”

Meanwhile, Federal Reserve Bank of St. Louis President James Bullard said the U.S. economy has enough momentum to continue its recovery from the coronavirus slump even if Congress fails to pass additional taxpayer support.

Gold is going to have a hard time rallying if the government doesn’t provide the fiscal stimulus the economy needs right now to sustain its earlier gains. Furthermore, additional signs of a sputtering economy and weak stock prices are likely to continue to drive investors into the U.S. Dollar, and this should weigh on foreign demand for gold.

Gold will eventually hit a value area that will be too attractive for buyers to pass up, but this is only likely to put in a bottom. More stimulus will be needed to drive the market through highs. This means that once finding a value-oriented bottom, gold is likely to remain rangebound.

As far as the election is concerned, we’re likely to see volatility, but that doesn’t guarantee that gold will rally (remember, it’s not a safe-haven). If the volatility fuels a flight to safety rally into the U.S. Dollar and a stock market crash then gold is likely to plunge even further.

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