The gold market is coiling ahead of US elections, a term that is associated with relatively rangy markets that are getting ready to make big moves. Over the past month, the gold market has basically gone nowhere, staying within a range of USD1850-1930/oz. The results of the US election might be an important catalyst for gold’s next leg higher.
We do not seem to be any closer to a pre-election fiscal deal. But fiscal stimulus will likely come soon after the US election regardless of who wins it. The size of the stimulus will depend on the outcome of the Senate race, with bigger stimulus likely in the event of a Democratic sweep than if Republicans maintain Senate majority.
Our view is that post-election reflationary policies will be gold's new friend. Lower real interest rates are positive for gold. Real rates can fall if markets believe that the economy will reflate, particularly in the event of a Democratic sweep. Prospects of higher inflation will benefit gold as an inflation hedge.
The Fed has now given itself licence to overshoot its inflation target via the formal softening of that target. Recall that the Fed has undershot the 2% inflation target on its favoured inflation indicator, core Personal Consumption Expenditures (PCE) inflation, for 11 of the past 12 years. But credibly achieving an inflation overshoot would require assistance from a tool the Fed cannot control: fiscal policy.
We are also positive on gold because central banks can print money but not gold. As the pandemic shocked governments out of their respective fiscal comfort zones, the risk of central banks attempting to inflate away a debt overhang seems higher. As central banks step up quantitative easing, currency debasement fears are set to drive gold higher against major currencies such as the USD, EUR and AUD.
The Reserve Bank of Australia has hinted at another round of monetary easing soon. Other major centrals banks such as the Fed and the European Central Bank could go down the same road. Virus-related lockdowns are once again becoming a reality in Europe, weighing heavily on the short-term economic outlook.
Emerging market (EM) countries such as China and India are also an important part of the gold story, especially demand for gold jewellery. Demand for jewellery has taken a backseat during the recent gold price run-up because EM economic growth has been lacklustre. However, EM demand for gold could start to strengthen as growth improves. One bright spot is China where growth pick-up is becoming more broad-based.
A widely available vaccine would make us more cautious of the outlook for gold, but that is more a concern for 2022 or beyond. We continue to forecast gold prices to rise to USD2150/oz in a year's time.Disclaimer applicable to recommendation
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