Gold, XAU/USD, Inflation Bets – Talking Points
- XAU/USD still primed for move higher as Fed’s QE continues to expand
- Shifting U.S. political climate poses risks to gold’s fundamental drivers
- Treasury-Federal Reserve discourse over CARES funding boosts gold
XAU/USD Fundamental Outlook: Bullish
Gold prices fell for a second consecutive week as traders reassessed their outlook on global markets. Fundamental macro drivers in the global economy continue to rapidly shift. The yellow metal is down over 4.5% from its monthly high of 1965.55 set on November 9. Despite the recent drop, XAU/USD remains over 20% higher year-to-date. Still, recent discourse between the Federal Reserve and the Treasury injected some risk-off bidding on gold to end the week, pushing prices marginally higher.
Treasury Secretary Steven Mnuchin, in a letter to the Federal Reserve, asked for about $430 billion in unused CARES Act funding to be returned from a portion of emergency lending facilities set to expire at the end of the year. The letter caused some confusion, resulting in a response from the Federal Reserve highlighting the need for these facilities to continue as a backstop. Gold reacted to the uncertainty, rising above the 1870 handle.
Gold Hourly Price Chart
Chart created with TradingView
Gold bullish sentiment has been flying high this year, as the inflation hedge looked primed to benefit traders’ portfolios. Investors keyed in on several bullish drivers, but one principal cause stands out, unprecedented monetary stimulus. Faced with severe economic consequences this year, central banks worldwide took decisive action through monetary policy tools, most notably quantitative easing. The Federal Reserve’s balance sheet continues to grow as these efforts continue.
Federal Reserve Balance Sheet, TIPS Bond ETF, Gold
Chart created with TradingView
That said, investors and economists forecasted an environment conducive to rising inflationary pressures. So far, however, inflation has failed to manifest through current data in a meaningful way. Market expectations still appear poised to the upside, though to a lesser extent. The iShares TIPS bond ETF, which tracks U.S. inflation-protected securities, has risen alongside gold for much of this year. The recent pullback in the ETF reflects well with Gold’s decline following highs set in August.
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The easing in inflation expectations is likely, in part, caused by the 2020 U.S. election outcome. The projected political climate in the country appears poised to deliver less fiscal stimulus as the projected presidential winner, Joe Biden, will likely face pushback from the GOP–controlled Senate on any significant stimulus measure. Consequently, inflationary pressures appear less likely on the fiscal side.
All things considered, the economic outlook remains subject to the ongoing Covid pandemic. While a vaccine approval appears imminent, distribution will likely take many more months. In the meantime, the worsening virus situation leaves much uncertainty for investors to mull over. Overall, with the Federal Reserve and other central banks continuing to support the economy through monetary efforts, the outlook for gold should remain to the upside, despite a muddied outlook on fiscal stimulus.
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— Written by Thomas Westwater, Analyst for DailyFX.com
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