GOLD : Stimulus Effect
(Mon, 28 Dec 2020). Gold prices rallied as much as 1% on Monday after President Trump signed a $2.3 trillion bill that contains $900 billion in pandemic relief aid and $1.4 trillion in government spending to fund federal agencies. This removes immediate uncertainty and allows the distribution of checks and loans to individuals and small businesses, as well as funds to assist the vaccine rollout to counter the pandemic’s impact.
Gold prices soared 1% to hit the US$ 1,900 mark before giving back some gains, and risk assets rallied broadly following the news. Although the US Congress passed the stimulus package as early as on December 21st, President Trump’s refusal to sign the bill had created much uncertainty over the last week.
As sentiment improved, the US Dollar fell to a one-week low of 90.10 and looked set to continue its downward trajectory. Gold prices and the DXY US Dollar Index historically exhibit a negative relationship, with a correlation coefficient of -0.78 over the past 12 months.
The macro environment tends to favor precious metals as central banks and governments remain committed to monetary easing and fiscal support as the Covid-19 pandemic continues to evolve around the globe. New types of Covid-19 virus strains found recently hint at more time needed for an economic recovery if vaccine development fails to catch up the pace of viral mutation and spread.
Technically, gold prices have likely broken above a “Descending Channel” that formed since early August (chart below). Prices have since formed higher highs and lows – an encouraging pattern that points to a potential medium-term trend reversal. Prices are attempting to breach the 100-Day Simple Moving Average (SMA) line at US$ 1,886, breaking above which may open the door for further upside potential.
An immediate resistance level can be found at US$ 1,910 – the 61.8% Fibonacci retracement. An immediate support level can be found at US$ 1,870 – the 76.4% Fibonacci retracement.
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