Gold is not just another commodity, people have been using gold as a currency since 550 BC. Even after the gold standard ended, it is still being used against both global risks and inflation. In this article, we will study gold’s mid-term outlook in this pandemic era.  

Current Situation

• US Elections: Biden won the elections. It may not be over yet, Trump will probably use everything in his power to change the outcome through legal or maybe even illegal means but looks like he couldn’t find the support he needs from the Republican Party. Stimulus talks may begin soon, but the amount of bill will probably less than expected a month before when most analysts expected a blue wave.
• US Economy: Current state of the economy shows signs of improvement both in the production and the jobs market side. Inflation seems steady for now, well above expectation made when the pandemic crisis began. But this may be a temporary period. Yesterday, Fed announced the “Financial Stability Report” and warns that it is not over yet. Household bankruptcies may rise in the near future if the stimulus package delays. There are reports that mortgage payments fail to increase rapidly.
• Covid-19 and Vaccine: Covid-19 new cases coming in full force. Europe is in lockdown mode and in the US over 100.000 cases seen daily. This winter is going to be bad if this trend continues. But yesterday we had some good news from Pfizer. Their vaccine is almost %90 efficient in test and they are going to apply for clearance this month. The plan is 50 million doses this year and 1.3 billion doses until the end of 2021. This means 650 million vaccinated people if it all goes according to plan. But the test is not over and long-term effectiveness is still unknown. In a good scenario that will include more than one vaccine, the first effects cannot be seen until summer.

Inflation Expectations

Gold is still a used commodity against inflation for years. When investors think that their money will lose value, gold investments increase. As seen in the chart above gold and inflation expectations are highly correlated. But for the last month, there was a divergence and it was about to clear up but the news about vaccines caused panic selling, and at the same time inflation expectations increase. Now the divergence is bigger than before. This may be good for gold, especially in short term.

Debt to GDP

Gold is not only been used against inflation but for global risks as well. With the pandemic crisis and stimulus packages from the government, US budget deficit is at its record highs. Public debt numbers increasing fast. When studying public debt it is more appropriate to look debt as percentage of GDP rather than looking total debt nominally.

US debt to GDP was around %105 for some time which was already high. But since the pandemic, rising debt and falling GDP cause the ratio to increase by %128. This may not be a big problem as long as interest rates remain low. But if US inflation which expected to remain low for some time, begins to rise above %2, the debt situation may cause some problems which will be extremely bullish for gold.

Central Banks

FED and many more central banks have been trying to help the markets against slowdown by purchasing assets and increase liquidity levels in markets. This move is reducing the value of the dollar and increasing the inflation expectations (at least stops the decrease of inflation) which is both in favor of gold. As we talked before inflation expectations and gold is highly and positively correlated.

In the next two months, ECB İS most likely increase its purchases, and in the US talks of a new stimulus package will begin. Markets are expecting some kind of a move or hints of a move from FED. This is creating an environment in favor of gold.

Market Expectations

Despite yesterday’s big fall, ETF positions remain steady. This shows market’s medium-long term higher gold expectations.

Comex inventories remain high for some time which may means that physical gold demand is still high. 

In futures market, net non-comercial position fell a little but still on the positive side.

An Important Technical Indicator

One of the best indicator for xauusd is 144 day moving average. Medium-term trends usually use this average as support and resistance and if price deviate far from it, this signals that a reversal may be imminent. As seen in chart above whenever price was above 3 standart deviation of 144 day average, there was a reversal or consolidation period and for the last three years this average is supporting the uptrend. Not surprisingly yesterday’s big fall end at 144 day moving average

Summary

• Upward pressures may continue for some time because of the global risks which is mostly from covid-19, remain high.
• As central banks increase their assets and governments (mainly the US) fighting the slowdown with stimulus packages, gold’s value may stay high relative to currency’s.
• As long as inflation expectations remain steady or elevated to the upside gold may remain as a good investment for the medium-long term.
• 144-day moving average continues to support ongoing uptrend near 1850.
• The biggest downside risk for gold in the short–medium term is more effective vaccine news and decreasing covid-19 risks. But in the long run, this may increase inflation which will favor gold more.