GOLD : Slipping into Downtrend

(Fri, 11 Dec 2020). GOLD PRICES STRUGGLING, EVEN AS DOLLAR SLIDES

Whenever a USD-denominated asset is trading lower on a day when the US Dollar (via the DXY Index) is trading lower too, you know that something is amiss. Unfortunately, that’s where gold prices find themselves as the week heads into the final stretch of the week. Despite fresh two-year lows in the DXY Index amid a breakout in EUR/USD rates after the European Central Bank announced fresh stimulus, gold prices are trading in the lower half of their multi-month downtrend, carving out a ‘lower high’ in the process.

We’re still in the early innings of what may be the worst case scenario for gold prices. As we’ve seen since the US presidential election, no ‘blue wave’ means no significant fiscal stimulus. With the US economy is regaining its long-term economic potential thanks to the vaccine news (even if the short-term outlook is increasingly dark, with a likely contraction in Q1’21), the reach for gold as a safe haven has been cut down.

GOLD PRICES AND GOLD VOLATILITY, OUT OF TOUCH

Gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – gold tends to benefit during periods of higher volatility. Heightened uncertainty in financial markets due to increasing macroeconomic tensions increases the safe haven appeal of gold. Reduced political tensions tend to decrease the safe haven appeal of gold.

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