Gold prices are retracing from highs today after touching their highest level in more than 7 years. The Gold price hit a peak of $1,779 yesterday as investors started to diversify their bets. Five key factors are likely to push gold prices higher in the coming days.
Lets dive deeper.
Investors are largely risk-averse due tothe threats of coronavirus second wave. New cases have started to surge. It wasto be expected that there would be some spike in coronavirus cases as economiesbegin to re-open. But what wasn’t priced in was that the situation would startto get out of control just as it did in Texas. New cases have soared 4.5%, andhospitals are close to their full capacity.
Australia has reported its largest one-dayspike in coronavirus cases in nearly two months, and this has raised alarmbells of a possible second wave.
The UK has announced the re-opening of itspubs and restaurants, and travel restrictions are likely to be eased off fromnext month. Remember, the UK was one of the worst countries in terms of dealingwith the Covid-19 crisis, and it has the third-largest casualty rate due to coronavirus.If appropriate measures are not taken and respected, we will probably seeanother coronavirus wave coming to the UK.
Of course, positive news on the Coronavirusvaccine or success in calming down the protests, and protecting the global economyfrom damage can keep the gold prices in check, and this may halt the sharp risethat I am expecting.
New Tariffs OnEurope
Donald Trump, the man who is known forescalating trade tensions, anchored trade tensions once again yesterday. Trump is weighing new tariffs on $3.1 billion of exportsfrom the UK, Spain, France, and Germany. If tensions continue to rise on thisissue and Trump doesn’t back off from his stance—which could be one of histactics to show himself strong ahead of the US elections—investors are likelyto steer away from riskier assets.
However, if for somereason, the trade tariffs are avoided, or investors do not see this a potentialthreat to global economic growth, gold bulls may not succeed in pushing thegold price higher.
China-US Trade War
China is not a country that is going to sit on its hands and let the Trump administration to bully it. The Phase-one US-China trade deal has become immensely fragile due to coronavirus. China has reduced its Agriculture and poultry from the US. There has been confusion about the US-China trade deal, and Trump has also talked about “decoupling” from China. In addition to this, China sees the US stance on Hong Kong as interference in its domestic affairs.
Traders do not like the US picking a fightwith the second biggest economy of the world, and we have seen the evidence ofthis last year that jolted the US stock market.
If for some reason, we see the relationshipbetween the US and China getting back on track with no further threats to theUS-China trade deal, we may not see a massive surge in the gold price.
The USUnemployment Claims
The weekly jobless claims data continue topaint a very dull picture for the US labour market.
Sadly, with the regional shutdown of stores in the US, it seems the minor recovery we have seen so far could be under a significant threat as well. In simple terms, the unemployment claims numbers are already ugly, and they are likely to become even worse because companies like Apple have begun the process of re-closing of their stores in US coronavirus hotspots.
The job market is the most important for the Federal Reserve, and Fed monetary policy is highly reflective of this. The Fed is determined to keep the interest rate lower for longer, and they are unlikely to increase the interest rates anytime soon.
Another major central bank, the Bank of England, has provoked a new idea concerning interest rates, and will not increase the interest rates while the government balance sheet is mammoth. Andrew Bailey, the governor of the Bank of England, has talked about this, and, likely, the Fed will also pay attention to this notion.
The third earnings quarter is currently wrapping up. At the beginning of this quarter, there was some hope for improvement as the economies began to re-open. But the emergence of the second corona wave is likely to trigger another cautionary note from US companies and investors are not going to like it. The US stock market rally that we have seen after the Covid-19 stock market crash could lose its momentum. Again, the risk-off mode is likely to spur interest in gold.
However, if the US corporates start tofocus more on the positive side and for some miraculous reason their cash burnratio goes down, we may not see much movement in the gold prices.