GOLD : Market Volatility
(Tue, 3 Nov 2020). Gold is trading on its front foot to start the week with the precious metal attempting to claw its way back from the 1.5% slide last week. The price of gold currently hovers around $1,890/oz at the time of writing after a rebound off technical support provided by September swing lows around the $1,860-price level. This area could continue to provide an area of buoyancy for gold price action going forward.
Gold prices could face a return of selling pressure, however, as the precious metal approaches the underbelly of its 100-day simple moving average and bearish trendline extended through the 06 August and 21 October highs. The zone of confluent resistance near $1,930/oz could also stymie rebound attempts by gold price action.
Yet, a topside breakout might be in the cards if a much-needed bullish catalyst materializes. Topping the $1,930-price level could open up the door for gold bulls to target the psychologically-significant $2,000-mark, but a confirmed breach of the $1,860 support zone has potential to fuel a bearish move toward the June swing high.
Gold price action might mirror the direction of expected market volatility nonetheless. In consideration of potential for a contested presidential election, investor uncertainty has bulged, as is reflected by a sharp spike higher in the VIX Index, or fear-gauge. Risk aversion has also mounted on the back of surging COVID-19 cases and returning lockdown measures.
That said, if a contested election is avoided, and market sentiment subsequently improves, it is likely that expected volatility normalizes and gold prices edge higher in turn. This bullish gold scenario could warrant more credence if there is a Biden victory and democratic sweep of both chambers of Congress. On the other hand, a contested election and deadlocked congress could serve as a bearish development for gold prices.
That said, there are other fundamental drivers beyond the election that stand to weigh materially on gold price action. I noted in a recent gold forecast how the precious metal largely hinges on inflation expectations, which still seems to be the case. With that in mind, the Federal Reserve interest rate decision and monthly release of nonfarm payrolls scheduled this week stand out as additional catalysts for gold volatility.
Expanding on this with a focus on real yields - the difference between nominal interest rates and inflation expectations - we see that gold prices have faced selling pressure as real yields ricochet off record lows. An extended advance in real yields could thus present bearish headwinds for gold. Conversely, if real yields start to snap back lower, gold prices have strong potential to resume their broader bullish trend.
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