Gold Fundamental Outlook: Neutral
- Gold[1] is still struggling to gain further momentum
- Restrained global yields work in XAU/USD[2]’s favor
- Risks ahead: RBA, BoC, ECB, US jobs data, Brexit
Anti-fiat gold prices will likely continue focusing on fundamental[3] headlines that impact the US Dollar[4] and Treasury yields. The yellow metal has been struggling to find material upside momentum[5] after its pace of appreciation notably cooled from the middle of April. Will this change in the week ahead?
Gold is a non-interest-bearing asset that can also benefit during periods of relatively high inflation. The coronavirus outbreak and subsequent lockdown measures have raised near term prospects of deflation as economies contract. But also, central banks around the world have taken bold measures to support growth by slashing borrowing costs and in some cases, resorting to unconventional policies like quantitative easing.
The latter are designed to help jumpstart growth and try to boost inflation down the road. It is unlikely that major central banks, such as the Fed and ECB, will raise rates in the near term. As such, depressed yields may work in gold’s favor in the medium term. It should also be noted that gold is relatively less liquid than most major fiat currencies, specifically compared to the haven-linked US Dollar.
This means that an event that suddenly induces aggressive risk aversion, such as the coronavirus, may boost the Greenback as investors prioritize preserving capital. In fact, when global stock markets collapsed in February and March, gold eventually succumbed to selling pressure as the US Dollar soared. Since then, rising stock markets and a cheaper USD have likely been working in the yellow metal’s favor.
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