FX.co ★ Gold rallies as markets overestimate the level of risk in the system

Gold rallies amid hopes for additional US stimulus

According to Rhona O'Connell, head of market analysis for EMEA and Asia at StoneX, the yellow metal is rising because markets are overestimating the level of risk in the system.

As the week goes on, many will focus on the issue of stimulus, especially since US politicians continue to debate on the coronavirus relief package and $ 1.4 trillion spending bill, with Friday seen as the deadline.

One way to postpone the deadline (by one week) would be a congressional vote on a temporary funding bill, which will allow more time to reach agreement on both costs and COVID-19 relief.

Meanwhile, another reason that fueled the hopes for a new stimulus, and accordingly, the rise of gold, is fear of inflation.

Fritsch said, "new economic aid, financed by debt, will lead to higher inflation expectations. Central banks have already pledged to continue their over-expansionary monetary policy, and real interest rates are moving deeper in the negative direction. These are key arguments in favor of rising gold prices. "

In the meantime, strategists at TD Securities said, "beyond the fiscal stimulus, there is the Federal Reserve, which is meeting next week for the last time this year," They added that inflationary expectations will be one of the main drivers for gold in 2021.

"The Fed is likely to extend the maturity of its Treasury purchases, thereby bolstering precious metals," they said. "The ongoing economic recovery will once again help increase the demand for gold. In fact, market expectations continue to point to rising inflationary expectations, which should eventually force capital to take refuge in gold, as nominal returns remain constrained. "

Another major boost to monitor this month is the flows of gold-backed ETFs, which peaked in October and recorded an outflow in November.