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Democrats' win disappoints gold investors as US Treasury yields, dollar rise

A weekly market summary for gold, Jan 4-8

GOLD started 2021 strong, rising to an eight-week high as uncertainty and tension built when US Senate elections in the state of Georgia came too close to call early in the week. The precious metal also had support from rising inflation expectations. But the sweep of both seats by Democrats had traders behaving in a typical "buy the rumour and sell the fact" manner. Traders took some profit off the table as prices failed to breach the US$1,960 psychological level.

Gold gave up its gains and moved sharply lower after a surge in US Treasury yields helped the US dollar rebound from a 2¾ year low. The US 10-year yield soared to new two-year highs above 1 per cent. This week, chaos erupted in Capitol Hill in Washington DC as a protest by President Donald Trump's supporters disrupted the certification by Congress of the Electoral College's presidential vote. Joe Biden has now been certified as the next US leader. Gold prices were set to remain soft towards the end of the week.

What should investors look out for in the longer term?

With the "blue" sweep of power in the US capital, the outlook for big spending plans for the US economy had increased considerably, which would trigger not only stronger growth for the economy, but also heavier borrowing by the US government. Those factors would be bullish for both gold and US Treasury yields. The yield on the 10-year Treasury has already gone above 1 per cent. Gold now has to compete against assets with higher interest-bearing bonds.

Although the outlook for gold remains bullish longer term, the short-term narrative may be driven by short-term events rather than stimulus expectations. The 10-year Treasury yield above 1 per cent would take some safe-haven buying away from gold. However, the Democrat win would indicate additional fiscal stimulus in the pipeline, more dollar weakness and support for gold in the longer term.

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Technical analysis for Comex February Gold Futures (GCG21)

The week saw gold prices appreciating in a continued mini-rally with the contract touching a high of US$1,962.50 an ounce, and then slipping to above US$1,900 before paring losses. Gold's rise past the upper band of the 20-period Bollinger to above US$1,960 is the second test of the band. The last test in mid-December did not work well with gold futures contracts - prices again fell back into the band with traders unconvinced of gold's short-term uptrend.

Daily technical mid-term indicators as the relative strength index (RSI) and the moving average convergence divergence indicator (MACD) have yet to show signs of being overbought or exhausted. The 10-day RSI is relatively flat above the mid-50 level, implying a period of consolidation above the US$1,900 level. The MACD is exhibiting bullishness and indicates a continued trend. Prices need to trade above US$1,900 for the short-term narrative to maintain bullishness. The major trend of gold is still bullish and deep pullbacks may be considered as opportunities. The major support for the GC Feb contract lies at US$1,860, US$1,820, and then US$1,767. Immediate resistance is at US$1,970, followed by US$2,000.

  • The writer is senior manager, commodities, Phillip Futures

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