GOLD FUNDAMENTAL OUTLOOK: NEUTRAL

• Gold prices tumbled early this past week on Covid vaccine optimism
• Rising coronavirus cases, US fiscal stimulus woes kept prices afloat
• The latter remain upside factors for XAU/USD, will losses reverse?

At the beginning of this past week, gold prices tumbled in the worst performance over a daily basis since the middle of August, catching some investors off-guard. Yet, follow-through struggled as the precious metal spent most of its time consolidating afterwards. XAU/USD’s behavior that day served as a reminder for traders of the downside fundamental risks.

This past Monday, Pfizer reported that its Covid-19 vaccine was more than 90% effective in preventing the disease. As a result equity markets, specifically sectors that were most impacted by the pandemic (such as travel and tourism), rallied the most. This optimism also extended into bond markets. Specifically, Treasury yields on the far end of the maturity spectrum soared – see chart below.

The latter reflects growth confidence in the medium term, pushing up real Treasury yields (inflation-indexed bonds). Gold is inherently an anti-fiat asset and generally suffers when rates of return on paper assets rise. The direction of the US Dollar is also a key player here. But what likely kept XAU/USD from sinking further are key threats to global growth that will likely remain in play ahead.

One of them is the record rise in US Covid cases, picking up exponentially this past week. Europe is also experiencing another wave. These have opened the door to lockdowns to help contain the spread. Meanwhile, while Joe Biden is on course to take the White House, Congress is looking to be divided. The composition of the Senate will not be known until at least January due to runoffs in Georgia for the upper chamber.

Meanwhile, Senate Majority Leader Mitch McConnell reiterated Republicans’ position on a smaller targeted fiscal package compared to what Democrats are proposing. This is as President Donald Trump was reportedly stepping back from stimulus negotiations. While the markets may continue welcoming upbeat vaccine news, rising Covid cases and the ongoing delay in US fiscal stimulus could keep gold prices afloat.

GoldMIXEDData provided by IG

GOLD FUNDAMENTAL DRIVERS – DAILY CHART

Gold Chart Created in TradingView

*Majors-based USD index averages it against: EUR, JPY, GBP and AUD