The gold market may see continued buying interest on Tuesday as the trading week gets underway. Monday saw little action as U.S. markets were closed in observance of the Presidents Day Holiday. As traders and investors return, the focus for markets is likely to be centered around equity markets, the threat of rising inflation and monetary policy.

 

The big news over the last several days is without a doubt, the acquittal of former President Donald Trump. Although the vote carried significantly more “guilty” votes than “not-guilty,” the senate still lacked the necessary two-thirds majority required by law for a conviction. The biggest question now is how might Trump look to remain heavily involved in Republican politics. Of course, time will tell how Trump will play his cards. In the meantime, however, the government and even some Republicans will try to figure out how to move on in his absence.

 

One of the major issues that the Trump administration dealt with is energy independence and the need for domestic oil. The Biden administration has already placed a moratorium on new oil and gas leases and drilling permits in a move that could potentially send the price of oil higher. Crude oil futures for March delivery have recently breached the $60 per barrel level on the upside. This higher price of crude oil could be indicative of rising inflationary pressures that could send the cost of everyday goods and services sharply higher.

 

Not only have oil and some other markets provided possible clues as to rising inflation, but the massive stimulus package currently being discussed by U.S.leaders could also fuel rising prices even in the face of the ongoing viral pandemic.Treasury Secretary Janet Yellen, a former Fed Chairwoman, recently suggested in an interview that the stimulus bill carries with it the risk of inflation, but that the risk of not doing enough to fight the pandemic is greater. Although significant inflation could be and likely is a ways off still at this point, the more it is discussed the more that investors may seek out perceived safe haven asset classes to hedge their risk. The threat of rising inflation, now or down the road, could keep investors turning to alternative asset classes such as gold to mitigate their inflation risk, especially if the dollar weakens further.

 

Gold’s allure as an alternative monetary asset is not limited to investors, either. The state of Idaho recently approved a bill that would allow the state to hold physical gold or silver as a means of hedging inflation and a debased currency. The House Bill 7, as it is known, will now head to the state Senate for another vote after receiving widespread backing in the House. The Senate could meet as early as this week to begin discussing the legislation.

 

The gold bulls have been patient, but their patience could eventually lead to downside in the market if there is a lack of upside for the bulls to get excited about. With the market currently sitting around the $1818 area, the bears will look for a close under $1800 while the bulls may need to see a close above $1900 before getting more aggressive.

The gold market has made tremendous headway in the last year. The year ahead could, however, make last year pale in comparison. There are several major issues that could set the stage for gold’s rise in the month and years ahead. Many of these issues could find resolution in 2021, setting the base for a rally that could extend for several years or longer. This brief guide will highlight some of the major issues that markets must now contend with and discuss how they may affect the price of gold going forward.

 

Covid-19 Pandemic

 

The ongoing Covid-19 pandemic has dominated financial headlines for months now and could continue to do so for many months ahead. The virus has killed many people, infected millions and spread all over the globe in short order. Despite the recent distribution of multiple vaccines, the virus has maintained a stranglehold on the global economy. Recent death rates in the U.S. have reached record levels, and as the old saying goes, it may “get worse before it gets better.”

 

Widespread vaccine distribution is likely to take several months, with many healthy individuals likely not getting vaccinated until late spring or even early summer. As many bars, restaurants and other businesses remain closed, the long-term economic effects of the viral pandemic may not be determined for some time yet. Stocks, for example, still have the potential for a massive meltdown if economic conditions take a turn for the worse. Despite recent issues and challenges presented by the pandemic, stocks remain near all-time highs and could continue to work even higher in the months ahead.

 

Interest Rates

 

The Federal Reserve and other global central banks have once again taken key interest rates down to zero in the hopes that low rates may spur economic activity to combat the effects of the viral pandemic. In addition to lowering key interest rates, central banks have also engaged in significant quantitative easing operations in order to keep rates low.

 

The effects of central bank action remain unclear. Central bankers do appear ready, however, to maintain ultra-low rates through the year and possibly beyond. This period of very low interest rates could be considered bullish for gold and other hard assets.

 

Although expectations are strong for the Federal Reserve sitting tight through the end of the year, there is always the possibility of the central bank acting quicker if conditions change. A steep and rapid rise in inflationary pressures could, for example, force the Fed to begin tightening faster than currently expected. A rapid economic recovery once the viral pandemic is brought under control could also force the hand of central bankers. Whatever the case may prove to be, global central banks and interest rates are likely to play a key role for gold in the year ahead.

 

The U.S. Dollar

 

The dollar index has recently traded at multi-year lows versus a basket of key currencies and its downside may be just getting started. The effects of ultra-low interest rates combined with significant quantitative easing have fueled the bears in recent months. The incoming Biden Administration, should it continue with current monetary policies, could see another sharp decline in the value of the dollar that could see it trade at levels not seen in many years. As the dollar loses value, the cost of everyday goods and services rises, effectively lowering the disposable incomes of Americans and those who use the dollar. This income lowering effect even extends into investment returns, lowering the net value of returns, sometimes significantly.

 

The effects of significant dollar weakness can be long-lasting and profound. The greenback is not only suffering from the effects of current monetary policies, but also is likely seeing additional weakness as its status as the global reserve currency of choice becomes increasingly threatened. The dollar has long been valued as a reliable store of wealth and value. That notion has come under fire in recent years, however, as the currencies of other nations have become increasingly valued. An ongoing deterioration of the dollar’s value or a switch to an alternative by global central banks could send the dollar sharply lower. Gold and other dollar-denominated assets could stand to benefit handsomely if the dollar drops further. Gold and other metals may, therefore, be purchased in the year ahead as a meaningful hedge against a weaker currency.

 

The three issues listed above could become key drivers of the gold market in the year ahead. There are, however, numerous other factors that may also contribute to gold’s price action in the coming months. These include U.S. politics, Brexit and equity market behavior.

 

Against the current geopolitical and economic landscape, the gold market could be poised for some serious movement this year. Recent price action has suggested that the trend higher may be set to continue and even reach new heights. The market may continue to be bought aggressively on any significant dips in price as well, further bolstering the bulls’ case for fresh all-time highs in the near future.

As the trading gets underway for the new year, several key themes are likely to drive price action. Some of these themes have already made themselves evident, while others have yet to garner significant attention.

The gold market may look to stabilize in the near-term and to give the bulls more reasons to buy. Recent downside deflated much of the market’s hot air, although much of that warm air can be quickly replaced under the right circumstances.

The nearly-$70 per ounce decline seen in gold to end last week took the market below its key 200-day moving average. Although there could be several reasons for the severe decline, some analysts have suggested that Bitcoin could have been a primary culprit for gold’s sell-off. On Friday, Bitcoin breached the $40,000 level on the upside for the first time ever, and many would-be gold buyers could have found themselves wanting to exit gold and get involved in Bitcoin or other crypto-currencies.

Of course, things can and do change fast, often times too fast. Monday’s decline of 20 percent in Bitcoin may have eroded much of the market’s recent allure, and some or even much of that capital could find its way back into the gold or precious metals markets. A fresh infusion of investor interest and capital could steer the yellow metal higher again, while smoothing market volatility.

While interest rates, the economy and Bitcoin can all have a significant impact on the gold market, investors are also likely to keep their eyes open on President Trump. As time winds down on the Trump Administration, concerns appear to be growing that Trump has become unhinged, detached from reality and could pose a serious danger to national security. Democrats plan on voting on Trump’s second impeachment this week
and appear to be in a hurry to get him out of office as quickly as possible.

Last week’s violence and destruction at the nation’s capital provided a clear indication of what could potentially occur as the country gets ready for a transfer of power. Recent reports on Monday suggested that armed protests could be set to take place in the U.S. on the 17th. Any protest, in any location, runs the risk of violence. If things do get out of control again, the consequences could be severe. The uncertainty surrounding the upcoming transfer of power could keep gold and other metals well-supported as investors seek out their perceived safety.

The incoming Presidential administration may also prove to be bullish for gold and metals. As Biden takes power, the U.S. could possibly look to increase government spending and stimulus measures in order to fight the ongoing viral pandemic. Further spending could not only lead to a sharply weaker currency, but could also fan the flames of inflation down the road. With the U.S. Federal Reserve ready to hold rates low for some time yet, the risk of accelerating inflationary pressures may rise substantially in the months ahead. A quick and significant rise in prices could lead to even more buying in gold and other hard assets, possibly providing them the fuel needed to break out to fresh highs on the upside.

The gold market started this trading week off on the right foot, adding nearly $30 per ounce for the session. The buying was likely based on a slight increase in global risk aversion as well as some positivity on the daily chart.

 

The stress of the ongoing COVID-19 pandemic continues to wreak havoc on the healthcare system as more than 100,000 have now been hospitalized in the U.S. due to the virus. Although hopes for a vaccine have likely led to some buying in equities in recent weeks, the vaccine is not likely to be distributed on a widespread basis for some time yet. It could still be many months before the vaccine is made available to the general public. That fact, along with the upcoming holidays, could make for some very rocky times ahead. Some have suggested the worst of the pandemi8c is still yet to come, and with many people wanting and even planning to get together over the holidays, American hospitals could see a massive influx of cases in the weeks approaching.

 

In addition to the ongoing viral pandemic, markets are also worried over the possibility of additional U.S. sanctions against China. The U.S. is reportedly ready to slap sanctions on some Chinese officials in response to China’s crackdown on Hong Kong protestors. Any further sanctions could invite a response from China, and the global trade scenario could take a rapid and significant turn for the worse if the globe’s first and second-largest economies continue their war over trade. As if the global trade situation was not enough, investors are also becoming increasingly worried over Brexit, as chances of a no-deal Brexit appear to be on the rise.

 

On the other hand of all of this, U.S. lawmakers appear to be making solid progress on another stimulus plan that could total nearly $1 trillion. In another sign of economic positivity, the Chinese economy has continued to impress. The nation reported their largest rise in exports for several years and has apparently overcome the virus more rapidly than the U.S. The strong Chinese economy could potentially keep demand for gold bullion on the rise and may even keep the global economy out of recession if all remains equal.

 

The U.S. Dollar has also been a major catalyst for gold prices and the Dollar Index saw a bit of a bounce today. After hitting a 2.5-year low last week. Further dollar weakness could keep the gold and metals markets from moving much lower while maintaining a bullish bias over the long-term. Current U.S. monetary policy may keep the dollar on the defensive and the greenback could see a significant decline if long-term support on the chart fails.

 

Today’s outside-day up has leveled the playing field between market bulls and bears. If the bulls are able to maintain recent momentum, they could look to challenge the $1900 level. If the bears begin to take control again, however, the market could potentially sink towards the $1800 level. A breakdown below this area would inflict significant chart damage and could even lead to a reversal in the long-term trend.

This week could be a critical one for the gold market as numerous issues could come to a head. The yellow metal began the trading week losing gains seen in overnight action as a new vaccine for COVID-19 was reported to be nearly 95% effective. Traders and investors eagerly stepped in to buy the dip, however and drove the market back above the unchanged line. Both a weaker dollar and stronger crude oil prices also affected the yellow metal today, helping to keep prices from falling.

 

The new Moderna vaccine is said to be 94.5% effective and only requites standard refrigeration compared to the intense cold required by the latest vaccine produced by Pfizer. With some 11 million virus cases and hospitals that are quickly reaching or already at capacity, news of an effective vaccine could not arrive fast enough. Although it may take several months for the vaccine to become widely distributed, some investors are already looking towards life getting back to normal in the year ahead.

 

The vaccine news sent stocks sharply higher, and equity markets finished the day at their highs for the day. The strength seen in stocks recently could pave the way for more upside ahead, and alternative asset classes such as gold could see investors take a breather as they look to participate in equities and risk assets. Any pullback seen in gold is likely to remain shallow, however, as the overall effects of the viral pandemic have yet to be seen. Although the economy may stage a rapid recovery once the vaccine hits and the virus is stabilized, the negative effects of the pandemic could take months or longer to work their way through the global economy. Today’s Empire State manufacturing data are a prime example. The New York Fed reported that manufacturing declined sharply, from an October reading of 10.5 to a November reading of 6.3. The November reading was far below consensus estimates and countered increasing optimism over the global economy in the months ahead.

 

In addition to the viral pandemic, investors are also watching the President Trump campaign for any further activity on what it has called a botched election. Despite Trump still refusing to concede the election, he has seemingly acknowledged that Biden is the winner. That has not stopped Trump from preventing a smooth transition, however, as his campaign has yet to release the necessary funding for the Biden transition to take place. Without a smooth transition of power, more Americans could be affected by the COVID-19 virus.  Trump’s unwillingness to pass the torch smoothly could cost lives and may increase the pressure on the President to hand over power quietly and without hesitation.

 

The gold bulls scored a bullish outside day up on the daily chart after today’s action, but have significant work left to do to quiet the market bears. The bulls will look to close prices above the November highs around $1966, while the bears may look to drive prices lower to the November lows around $1850.