Gold recovery stalls as US Congress disappoints on fiscal stimulus

GOLD prices opened the week buoyant on hopes of further stimulus programmes from the US Congress and the European Central Bank. Prices were also lifted by a structurally weak dollar.

Concern about a no-deal Brexit intensified and sparked safe-haven buying of precious metals after a British official on Monday warned that talks over a trade deal with the European Union could collapse unless negotiators make progress.

Through the week, UK Prime Minister Boris Johnson warned that the two sides may have to accept a "no deal", while the EU's chief negotiator Michel Barnier told a meeting of the bloc's ministers that he believed a no-deal scenario at year's end was now more likely than agreement on trade ties.

Gold prices later collapsed in the week, after the dollar gained strength as optimism receded that US lawmakers would agree on Covid-19 relief.

What should investors look out for in the longer term?

The key drivers of gold - real interest rates and the dollar - are expected to remain soft without concrete economic progress worldwide or until an effective vaccine becomes widely available to the masses.

Central bankers may re-evaluate their policies taking in the effects of mass inoculation, and tweak stimulus programmes with less urgency going forward. Ultra-low yields and negative real interest rates are however expected to remain, and should provide support for gold in the long term.

We do not expect the dizzying speculator rallies that we experienced in 2020, but as the fundamentals driving gold have not changed, there is room for gold prices to rise but the appreciation would be gradual.

Technical analysis for Comex February Gold Futures (GCG21)

In the previous weeks, gold had drifted down past the US$1,800 support and recovered after hitting a low of US$1,767. Despite the recovery, the technical picture of gold has deteriorated and made a dent in the rally in gold. With prices staying below US$1,850, the shorter term technical picture appears weak.

This week, prices appreciated in a continued mini-rally from last week. Profit-taking and technical selling however set in after the contract failed to break through the US$1,880 level and collapsed 2 per cent.

The short-term trend is soft. Gold's failure to close the week above US$1,900 has weakened its technical picture in the short term. The MACD has crossed over but is in negative territory, and higher prices would confirm a long-term recovery. The RSI trajectory is rather flat at the mid-range 50, indicating some uncertainty in the market and suggesting consolidation at current levels.

The major support for the GC Feb contract lies at US$1,767 and then US$1,700. Immediate resistance is at US$1,880 followed by US$1,900.