Gold, Silver Price Forecast: Edging Higher As The US Dollar Retreats Lower

Gold and Silver prices advanced for a third day against the backdrop of a weaker US Dollar. Markets awaited a fresh US$ 1.9 trillion US Covid-relief package to be approved by Congress. The US Dollar (DXY) index retreated to 90.74 from a two-month high of 91.55 as stimulus hopes were built against the backdrop of a much weaker-than-expected non-farm payrolls report. Only 49k positions were added in January, falling sharply below market expectations of a 105k increase. Tepid job market sentiment called for more fiscal support and may refrain the Fed from considering tapering any time soon.

The Democrat-led Senate is working towards approving the US$1.9 trillion stimulus bill, which aims to revitalize consumer spending, strengthen vaccine delivery and foster a faster recovery from the pandemic. House Democrats proposed to broaden the eligibility of stimulus payments for middle-income households. Individuals earning up to 75k and couples earning 150k annually may be able to receive US$ 1,400 cheque payments.

Further weakness in the Greenback may continue to support precious metal prices, which tend to be inversely correlated to the US Dollar. Gold and silver prices exhibited a negative relationship with the DXY US Dollar index, showing correlation coefficients of -0.79 and -0.92 respectively over the past 12 months.

Gold vs. DXY US Dollar Index – 12 Months

Gold, Silver Price Forecast: Edging Higher as the US Dollar Retreats Lower

Source: Bloomberg, DailyFX

While inflation expectations and gold prices appear to have diverged over the past few months (chart below), a rising inflation outlook may still provide longer-term support to precious metals. That is because they are perceived as inflation hedges and a store of value. Renewed stimulus hopes sent the Federal Reserve Bank of St. Louis 5-year forward inflation expectation to a two-and-half year high of 2.14%. It could continue to rise should the economy bounce back strongly in the first quarter. Besides, relative underperformance of gold prices this year could be attributed to rising longer-dated US Treasury yields and an exuberant stock market rally. These have been making the yellow metal less appealing compared to riskier assets.

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