Gold rallies on Bank of England's QE expansion and a weak dollar

GOLD prices were drifting sideways throughout most of the week, as a "blue" wave failed to materialise early on in the US elections and hopes of a large fiscal stimulus faded. Gold finally rallied towards the end of the week to a high of US$1,950, when the Bank of England (BOE) expanded its quantitative easing (QE) by £50 billion (S$88.6 billion) more than the expected £100 billion. The dollar continues to decline against major currencies, providing some relief for gold prices.

Investors returned to riskier assets on prospects of a divided Congress in the aftermath of the US election. A rally in global stock markets had been pressuring gold prices and the dollar in a rare occurrence. There were also expectations that the recently concluded Federal Open Market Committee meeting might throw in some monetary stimulus in the face of a lack of action from US politicians. However, the Federal Reserve kept its loose monetary policy intact but pledged again to do whatever it can in coming months to sustain a US economic recovery.

Technical analysis for Comex December Gold Futures (GCZ20)

Trading for the week has been lacklustre, with most short-term technical indicators on the daily charts for gold painting a mixed technical picture. Without a supportive market moving event, gold prices have been inching slowly upwards throughout the week. Gold finally rallied and broke through resistance on the BOE announcement, changing the technical picture to bullish.

The 14-day RSI has a upward sloping trajectory that is however not steep. Medium-term indicators like the MACD index have crossed but remain lying in negative territory, suggesting a weak recovery in prices.

Major support for the GC December contract lies at the low of US$1,850 and then US$1,800. Resistance is at US$1,980, followed by the US$2,000 psychological level ahead.

Market assessment

With a divided US Congress and a disputed presidency, gold's direction ahead lies mostly in the policies of central banks.

Though the fundamentals that have been pushing gold remain unchanged, the policy framework of central banks may lead to a reassessment of the impact of structural market drivers that drove gold to record highs, especially as the Fed and other major central bank are loathe to introduce new monetary stimulus measures, depending rather on fiscal stimulus measures.

As the US vote count progresses towards the final tally, it's apparent that Joe Biden would most likely be victorious. A win by the Democrat would have a larger positive factor for the gold market. Despite the disputes and legal battles lying ahead and creating a lot of uncertainty, the new president may push for a larger stimulus than earlier negotiated which of course would favour gold.

The US dollar is also expected to weaken on a Democrat win, giving gold a further boost.