The current week is not going very well for the precious metals market. In just a few days, gold (XAU/USD) sank 2.5% and approached support at $ 1,780 per troy ounce.
Bears took advantage of local demand for the US dollar, which increased amid the recovery in US bond yields. The 10-year US Treasury yield rallied 1.30% for the first time since Feb. 27 2020. Since gold does not generate interest income, the growth of the most reliable financial market instruments—US Treasury securities—makes gold less attractive to investors and leads to a reallocation of capital in favor of the debt market. The main question is: how long will this trend continue?
Market participants believe that the US dollar sell-off will resume any day now. First of all, investors look forward to the adoption of the much-needed $ 1.9 trillion relief package in the United States, a.k.a Biden’s American Rescue Plan. The Democrats' current position in the Senate allows Biden to get around Republican opposition, which reinforces market confidence that the aid plan will be approved by the end of February. Investors hope that the new stimulus measures will offset the negative effects of COVID-related restrictions and accelerate economic recovery in the country.
In addition, when the stimulus-driven frenzy ends, the US economy will be left with bloated balance sheets and budget deficit, which will keep the dollar under pressure. Since the Fed still sticks to its low interest rate policy, growing inflation expectations in the US will be a contributing factor to the dollar’s downtrend. It’s worth noting that growing inflationary pressure is also a classic driver for gold’s growth because it acts as a hedge against the depreciation of traditional currencies.
Not only it retains its upside potential in the short-term, gold can also become an excellent option for long-term investments. Investors are comparing gold prices to stocks of companies associated with the gold sector. Under normal conditions, gold mining stocks show a strong positive correlation with the market prices for gold. Roughly 20% of companies in the gold sector have mostly traded above the 200-day moving average in the past two weeks. This cycle has been observed several times over the past few years and usually indicated the future growth of most gold miners in the next three months. Gold grew together with those gold mining stocks. That being said, while gold is trading near its multi-month support of $1780, we recommend that you consider buying it with a target in the $1850-$1900 area.