Despite significant losses in the fall, gold will end 2020 with a significant plus. At the same time, one of the reasons for its rapid rally to historical highs was the expectation of a reflationary environment due to a large-scale fiscal stimulus. The impasse in negotiations between Republicans and Democrats caused XAU/USD quotes to collapse below the 1800 level, but the resumption of talks in December brought the precious metal back to life. Investors are faced with the rare case when gold is led by Congress, and not by the Fed.
Everything that the Fed could do, has already been done. It aggressively lowered rates and flooded the markets with cheap liquidity. Large-scale purchases of US Treasury bonds by the Central Bank constrain nominal yields. The precious metal reacts to the real rates of the debt market, so its fate is in the hands of inflation. In this regard, the growth of inflation expectations to the highest levels in at least 12 months was the catalyst for the XAU/USD rally. According to Jeffrey Gundlach, a billionaire investor specializing in bonds, in 2021, inflation in the US will vary in the range of 2.25-2.4%, which contrasts with the consensus estimate of Bloomberg experts. The forecast of 51 specialists assumes growth of the indicator to 2% in the second quarter with its subsequent slowdown in the third or fourth.
The seasonal factor also plays into the hands of gold. From St. Lucia's Day (December 13) to the middle of the first quarter in 1999-2019, the precious metal grew by an average of 4.7% and closed in the green zone for three of the four periods. Most likely, this is due to active purchases of gold from Asian accounts on the eve of the Lunar New Year celebrations.
Gold dynamics from mid-December to mid-February:
Seasonality is an important factor in exchange rate formation, but the main driver of the XAU/USD rally, in my opinion, is the fact that gold has found its place in the system of the US dollar and Treasury bond yields. Previously, it was puzzling how the precious metal and the US dollar can fall at the same time. Now it is clear that the reflationary environment associated with the fiscal stimulus will, on the one hand, weaken the dollar by reducing the attractiveness of assets issued in the United States; and on the other, strengthen gold, which has traditionally been perceived by investors as an instrument of protection against inflation.
According to Joe Biden, any aid to the economy that Congress passes in 2020 will only be a down payment. Biden is seriously set up for huge fiscal incentives, which can not but please the bulls on XAU/USD. Alas, not everything depends on the President of the United States. Currently, Republicans hold 50 seats in the Senate, while Democrats hold 48. to pass bills quickly through Congress, the latter need to get two more. Otherwise, Biden will face serious difficulties.
Technically, the daily chart shows a rebound of gold from the lower limit of the previous range of medium-term consolidation. A drop in prices below $1840 and $1810 will be a sell signal. Purchases are interesting in the case of a confident test of resistances at $1890 and $1920 per ounce.
Gold, daily chart: