Gold futures hit a one-week high early Wednesday on growing prospects of further U.S. fiscal coronavirus relief, while awaiting the Federal Reserve’s monetary policy decisions that are expected to come in on the dovish side and could be the source of heightened volatility.
At 10:06 GMT, February Comex gold is trading $1868.20, up $12.90 or +0.70%.
Progress on Stimulus Deal
The “on-again, off-again” stimulus package negotiations has produced whip-saw action in the market for about three-weeks, proving to be the biggest source of volatility for gold traders. The current price action suggests this week’s news that some bipartisanship has emerged is helping to lift inflation expectations, which is a potentially bullish sign.
Our work indicates that if Washington lawmakers actually follow-through with their intentions and strike a deal, gold will breakout over $1879.80 and change the main trend to up for the first time since November 9.
The size of the rally, however, will be determined by the size of the stimulus package, which may be the source of confusion for gold market bulls. Figures as high as $2.2 trillion and as low as $908 billion have been tossed around for weeks, making it difficult to determine how much of a rally to expect from gold.
On Monday, a bipartisan group released its $908 billion aid legislation, but lingering disagreements over state and local government aid, liability protections and direct payments could make reaching a deal a challenge. In order to offset the disagreements, lawmakers have split the bill into two categories.
The first plan calls for $748 billion in spending for programs liked by both Republican and Democrats, including federal unemployment benefits and additional loans under the Paycheck Protection Program.
A second $160 billion bill would include the more controversial areas of business liability protections and financial aid to state and local governments.
Federal Reserve Monetary Announcements
The Federal Reserve will release its statement with projections on the stance of monetary policy on Wednesday afternoon at 19:00 GMT. Monetary stimulus is the source of long-term protection for gold, but today’s announcements are expected to cause volatile movement in the bond market, and since this affects longer-term interest rates, it’s likely to trigger a similar response in the gold market. So be prepared for a wild ride.
CNBC is saying that while the Fed’s long-term view is expected to be improved due to the vaccine, the central bank is expected to sound very dovish at the end of the meeting.
Fiscal stimulus (short-term) hopes are driving prices higher, while monetary stimulus (long-term) hopes are helping to solidify the support base for the precious metal.
Additionally, the bond market, and hence the gold market, could have a volatile reaction depending on what the Fed signals about its bond program.