Analysts said the gold market was holding its breath ahead of one of the most volatile weeks of the year.
The first week of November will see not only the most anticipated event of the year, the US election, but also the Fed’s interest rate decision and some key data, including us jobs data for October.
In October, gold fell below a key level of $1,900 an ounce and hit a one-month low of $1,859 on Thursday. On Friday, Gold futures for December delivery closed up 0.6 percent at $1,879.90 an ounce on the New York Mercantile Exchange, after falling 0.8 percent in October.
Trading volume in the gold market is very low, analysts say, because most price movements are led by algorithmic trading, with investors waiting on the sidelines for the uncertainty to end.
“There were only 134,000 contracts in December. A lot of trading is algorithmic trading. Many investors are sitting on the sidelines. In addition, the margin rate has also increased. That’s what’s driving the selling, “Kevin Grady, President of Phoenix Futures and Options, told Kitco News.
With so much uncertainty, analysts are not recommending selling gold during the election. In fact, most people would advise looking beyond the election-related noise and focusing instead on the long-term macro drivers that are very positive for precious metals.
“Metal holders should definitely not sell during the election,” said Peter Hug, head of global trade at Kitco Metals. “People who don’t own these metals and want to diversify by 10 per cent, my thinking is that you might want to put a small amount of money into an election, about 3 per cent.”
A possible scenario for next week
Hug said whether the vote is a “blue tide” or a “red tide” will have a positive impact on gold prices, with the “blue tide” likely to cause the biggest gold rally. The biggest risk, however, is that the outcome is uncertain or contested.
Markets are getting mixed messages about the ability of Democratic presidential candidate Joe Biden and current President Donald Trump to win the election.
“By Monday, Tuesday night, the market will be volatile. The real trading day is Wednesday, Thursday and Friday, “he said. “Whoever wins, there will be a major stimulus put into the market, which will give the metals market a big boost.”
Bart Melek, global head of strategy at TD Securities in New York, said a consensus is emerging that whoever wins, the United States will get fiscal stimulus and keep interest rates low. “If there is a blue wave, we will borrow and spend more and gold will rebound. “If there’s a red wave, we’ll spend less money, but it’s still good for gold.”
The biggest unknown is whether the election results will be announced soon. “If there is a clear winner, the stock market will go up and metals prices will go up on Tuesday night or overnight in Europe,” Hug said. If this is a tight election with no clear winner or if the election results are delayed by a few days, the stock market will come under pressure and people will turn to cash, which may not be good for metals.”
Grady added that the main question for next week is whether the United States will get the answer on Day one.
Melek said the worst case scenario for gold would be a close election because it would cause panic and delay the implementation of fiscal stimulus.
“As soon as we have clear results, we are stimulated. If we had a divided government, the stimulus might not be that great, but we would get something. Now, the market has sold off because we got nothing, “Melek says.
Why not water down the elections?
Kieran Clancy, assistant commodities economist at Capital Economics in New York, told Kitco News that the market tends to put too much weight on the election.
“In a way, this election is a red herring,” he said. We may have some volatility next week. There’s obviously a lot of uncertainty. But in the end, these moves will prove to be fairly short-lived because they won’t really change the outlook [that really drives gold] — the real yield.”
Clancy pointed to the 2016 Trump election as a good example of how markets went through a lot of volatility that eventually turned around.
“The 2016 Trump election provides a great blueprint. After Mr Trump was elected, there were huge swings in the markets, and there was more focus on what he could do than what he could not do. They focus on things that don’t end up happening. After a week or two, all these moves were unwound. I suspect we’ll see something similar this time.”
All in all, it has been real yields that have driven gold higher this year, meaning it is highly dependent on the US economy and the Federal Reserve.
“For gold, it’s very closely correlated with yields. From March to August, we saw a sharp fall in real yields. Since then, they have stabilized and may even have risen. That explains why gold experienced a pullback and then struggled to hold its own, “Clancy said.
The key question for gold, then, is what happens to real yields? Capital Economics expects gold to reach $2,000 by the end of the year, more than $100 above its current trading level, for the following reasons:
“Real yields are broken down into nominal yields and inflation compensation. The Fed will keep nominal yields very low for a long time. What determines the real yield is inflation compensation. If the recovery starts to pick up later this year or next year, inflation compensation will start to increase, “Clancy said.
“So if we see that nominal yields are not allowed to rise significantly and inflation offsets are increasing, that means real yields will fall again, and that also supports our view on gold,” Clancy explained.
Fed meeting and jobs data
In addition to Tuesday’s election, markets will also be digesting a series of economic data and events, including the Federal Reserve’s decision on interest rates next Thursday.
Analysts expect the Fed to continue to stress the need for fiscal stimulus at its meeting next week.
“The Fed [is likely] to retain its dovish bias at Thursday’s Meeting of the Federal Open Market Committee, promising to stand aside and provide more stimulus if necessary. We would expect to see them reiterate that fiscal policy is a more effective tool at the moment, “said James Knightley, chief international economist at ING.
On the data front, U.S. employment data next Friday will also be in focus, with the U.S. economy expected to have added 600,000 jobs in October, according to market consensus.
Next week’s other important data and events including four of the bank of England’s monetary policy meeting next week, next week, a U.S. consumer price index and ISM manufacturing pmi, next Tuesday’s U.S. factory orders, next Wednesday the ISM non manufacturing purchasing managers’ index and ADP employment data, as well as the next Thursday’s jobless claims.
The RBA will also announce its interest rate decision. The RBA meets next Tuesday and, combined with comments from RBA officials in recent weeks, particularly from RBA President George Lowe, the RBA is widely expected to cut the cash rate to 0.1 percent. The RBA will also cut its target rate for three-year bond yields and its term funding rate for Banks. The RBA is also expected to expand its bond-buying program to five – and 10-year notes in an attempt to keep market interest rates and funding costs low. If the RBA links its increased stimulus to its revised economic outlook, it suggests it expects Australia to miss its inflation and employment targets over the next two years.