Gold, Crude Oil Forecast: Stimulus, Treasury Yield And Pandemic In Focus

Gold prices edged slightly higher on Wednesday as silver prices attempted to recover some lost ground after falling over 8% on Tuesday. Enthusiasm surrounding the retail trader frenzy led to heightened volatility in silver earlier this week, but the spillover effect on other precious metals wasn’t particularly obvious. While silver prices swung as much as 20% from January 28th to February 1st, gold prices moved only 1.7% during the same period. Speculative activity on silver appeared to have cooled after the CME raised margin requirements, allowing a return of market focus on the fiscal stimulus and pandemic situations.

US lawmakers are working towards approving President Joe Biden’s US$ 1.9 trillion Covid relief aid without Republican support, as the US$ 600 billion proposal by the Republicans was deemed “way too small”. The Democrat-led Senate started a reconciliation process, which would allow them to pass Biden’s stimulus package with a simple majority and avoid a filibuster that requires at least 10 Republican votes to support the bill. Renewed stimulus hopes led longer-dated US Treasury yields to climb as expectations for future demand, output and inflation outlook rose. The 10-year rate edged up by 9 bps from a week ago to 1.109%. Higher yields may exert downward pressure over precious metal prices, which are non-yielding.

Gold, Crude Oil Forecast: Stimulus, Treasury Yield and Pandemic in Focus

Source: Bloomberg, DailyFX

Reflation hopes may encourage investors to park their money in equities in search of yields and growth, resulting in the relative underperformance of precious metals compared to stocks. Gold prices have lagged behind the S&P 500 stock market benchmark since August 2020, and this gap may widen if the economy rebounds at a faster-than-expected pace with the rollout of Covid vaccines and more fiscal aid.

Gold, Crude Oil Forecast: Stimulus, Treasury Yield and Pandemic in Focus

Source: Bloomberg, DailyFX

Technically, gold prices have entered ‘range-bound’ trading conditions after breaking below the “Ascending Channel” in early January, with US$ 1,810 and US$ 1,870 serving as immediate support and resistance levels respectively (chart below). The overall trend appears lack clear direction, as suggested by a flat MACD indicator.

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