Gold futures are hovering near their contract high reached the previous session on Wednesday. Demand for risky assets is a little weak, but Treasury yields are rising and the U.S. Dollar is firm. The price action suggests investors are shrugging off gold’s usual relationship with these markets and focusing more on potential stimulus from the government or the Federal Reserve.
At 06:03 GMT, August Comex gold is trading $1802.30, up $1.80 or +0.10%.
When the news says, “the metal’s safe-haven demand was boosted by worries about the global economic impact of surging coronavirus infections around the world,” I think what they are really saying is, “If a second wave of COVID-19 infections is worse than the first wave, then governments and central banks around the world, are going to have to be more aggressive with fiscal and monetary stimulus.
It’s not about the rise in the coronavirus cases per se, but how many additional funds are going to be injected into the global economy.
Fed Chair Powell Sounds the Alarm on Economic Fallout from a ‘Second Outbreak’
Federal Reserve Chairman hit the worry button on Tuesday while testifying before the House Financial Services Committee alongside Treasury Secretary Steven Mnuchin. The encouraged long gold investors to add to their established positions because when it comes to Powell, where there’s smoke, there’s fire.
“A second outbreak could force government and force people to withdraw again from economic activity,” Powell said.
Powell didn’t promise new stimulus, but he did say he remained committed to keeping interest rates low and providing its various liquidity facilities to ensure financial markets are operating properly.
“When the economy reopens – remember, we sort of deliberately closed the economy – that expansion can be vigorous and strong, and it’s just beginning now,” Powell said.
I’m not trying to turn bearish or pick a top when I say that chasing gold prices higher at current price levels is a little risky so before you go after it, make sure you know if you’re a short-term trader or a long-term investor. Also know your “exit” before you enter.
Just watching the price action on Tuesday, I felt like I was watching short-covering and buy stops being executed when traders took out the contract high at $1796.10. The follow-through to the upside was weak.
However, I wouldn’t worry about getting trapped on the wrong side of the market over the short-run unless sellers drive the market back through $1796.10.
In a really strong bull market, after a breakout, rather than try to chase the market higher, buyers start bidding at the breakout price. Early Wednesday, we’re seeing this kind of price action. So I can remain short-term bullish as long as $1796.10 holds as support. I won’t turn bearish if it fails, but it will tell me that investors are more interested in buying dips than new highs.
I don’t think the Fed minutes are going to shake up the markets when they are released at 18:00 GMT on Wednesday. In its monetary policy statement, the Fed made it clear that there would be no rate hikes through 2022 and that it would continue to protect the markets.
I do think the ISM Manufacturing PMI data could shake up gold especially if the number comes in over 50. This would mean the economy is expanding and that a fast recovery is still possible. Gold prices could drop sharply if this occurs.
For a look at all of today’s economic events, check out our economic calendar.