Gold Price Could Tumble by Another 4% In the Near Term

Jan 21, 2021 08:35 PM ET
Gold Price Could Tumble by Another 4% In the Near Term

Gold price is under intense pressure after a relatively strong performance in 2020. The price has dropped by more than 2% this year. This performance lags that of comparable assets, including Bitcoin and the S&P 500 that have jumped by more than 70% and 3%, respectively.

Gold vs S&P 500 and Bitcoin

Gold vs S&P 500 and Bitcoin

Gold price under pressure

Gold had a relatively strong 2020, helped by a weaker US dollar and oversize stimulus packages from the United States, European Union, and other countries. In fact, the price soared to an all-time high of $2,075 in August last year. Still, it lagged key assets. 

The price rose in 2020 because of the weak US dollar. The dollar index declined by more than 10% from the yearly high of $103 as the risk-on sentiment prevailed. In other words, investors started to embrace risky assets. 

Also, the Federal Reserve actions led more people to abandon the dollar. The US central bank slashed interest rates and launched a large quantitative easing program that led to the fastest expansion of the balance sheet. 

However, the price started weakening in August partly due to the strength of cryptocurrencies. In 2020, after dropping to a multi-year low, the price of major digital currencies like Bitcoin and Ethereum roared back. Today, most of them are trading at their all-time high and their market capitalizations have soared to more than $1 trillion.

As crypto rallied, we saw investors shifting their resources from gold to Bitcoin. The clearest evidence to this was the inflows to the Grayscale Bitcoin Trust, which soared to more than $23 billion. In the same period, most gold exchange-traded funds saw outflows.

What next for gold?

Joe Biden will be sworn in as the next president of the United States tomorrow. The implications of his presidency will possibly be bullish to the price of gold.

For example, the president has announced a $1.9 trillion stimulus package. If passed, it will mean that the country has launched a stimulus worth more than $2.8 trillion in the first quarter of the year alone. This package will be fully-funded by borrowing, which will push the total debt to more than $29 trillion. 

In addition to all this, Biden has proposed to spend more than $1 trillion in clean energy projects. He also has the support for a large infrastructure spending. In total, the federal debt could jump by more than $6 trillion in the next four years. This could lead to more demand for gold.

Meanwhile, there are signs that inflation is picking-up in the United States. The latest data showed that consumer prices rose by 1.4% in December. This means that they are just 60 basis points below the Fed’s target of 2.0%. With more stimulus, there’s a possibility that inflation will jump. 

However, the main risk for gold is the cryptocurrency prices. If they continue rising, more people will likely shift their funds from gold to them.

Gold price technical outlook

On the daily chart, we see that gold price found a substantial resistance at the $1,963 level. It has been falling since then and is currently trading at $1,838, which is slightly below the 25-day and 15-day weighted moving averages. The price is also on the same level as the 38.2% Fibonacci retracement level. Therefore, in the near term, the metal’s price will probably continue falling, as bears target the neckline of the double-top at $1,766. This price is 4% below the current level.

Gold price technical outlook

 


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