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Gold awaits US fiscal stimulus package

A weekly market summary for gold, Oct 12-Oct 16

GOLD futures spent the week drifting and reacting to sentiment that shifted according to bits and pieces of "news" that popped up in the media. Overall, sentiment had a slightly bullish bias. Traders kept an eye on the progress of the fiscal stimulus negotiations. US politicians continued to be poles apart, yet precious metals continued to draw support as traders clung to expectations for a larger US stimulus after the Nov 3 election, regardless who wins.

With the presidential elections so close, prospects in reality have faded for a new US pandemic relief package. Any new offers or withdrawals of negotiations from US politicians may just be window dressing ahead of the elections. The key question currently is not whether there will be a fiscal stimulus from Washington DC, but the size and the timing of it.

What should investors look out for in the longer term?

Traders would be watching out for who wins not only the US presidential elections but also the elections for a third of the seats in the US Senate. Currently the Republicans hold a small majority, and a sweeping win by the Democrats would see them holding majority in both the branches. Further, if the incumbent loses his presidential seat, the Democrats would easily approve a much larger stimulus package, which would be bullish for gold.

Unless an effective Covid-19 vaccine is made readily available, the possibility of further waves or another resurgence of the virus especially in the northern hemisphere with the coming winter is greater.

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Ultra-low yields and negative real interest rates are expected to remain as they are now for much longer, and this should provide support for gold prices in the long term. Central banks can be expected to continue to have major concerns about economic growth and not deviate from policies favourable for metals. Gold would continue to be supported by the Covid-19 pandemic that has curbed global growth prospects and prompted the world's central banks to maintain or even expand their quantitative easing (QE) programmes, which is bullish for gold demand as a store of value. Gold would also have continued safe-haven support from heightened US political tensions, US-China tensions, and the risks of a no-deal Brexit at year-end.

Technical Analysis for Comex December Gold Futures (GCZ20)

Trading for the week had been lacklustre, with most short-term technical indicators on the daily charts for gold showing signals that indicate uncertainty. The 14-day RSI, though in bearish territory, has a weak trajectory pointing upside, suggesting some recovery. Medium-term indicators though also in bearish territory have trajectories pointing upwards. The MACD (moving average convergence divergence) index shows trajectories that indicate a bullish crossover earlier in the week and are indicating a recovery upwards.

Trading is expected to be technical ahead of the US elections. However, there may be volatility from unexpected market moving events arising from the run-up to the elections.

Support for the GC Dec contract lies at the recently established lows of US$1,885, US$1,877 and major support is at US$1,850. Resistance is at US$1,940 and then US$1,984, then the US$2,000 psychological level lies ahead.

  • The writer is senior manager, commodities, Phillip Futures

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