November 20, 2020 / SquaredFinancial – The simple answer is that Gold is not finding buyers because there are no signs of inflationary pressures. Inflation rates in the US, the UK, and the EU are still way below 2%.
Despite increased government investment and government consumption to stimulate growth, which would normally create excess inflation, so far inflation has not materialized.
No inflation for Gold!
So why is inflation so low? We believe there are 5 main reasons:
- Monetary stimulus and QE are not ending up in the real economy.
There is a question as to whether governments will use future stimulus to directly invest in the economy, or will the printed money keep going into bonds and equities.
- Even after lifting leverage limits to encourage banks to lend to businesses during this crisis, banks are still not doing it.With interest rates so low, it simply is not profitable enough to do that. But now that governments are starting to force banks to provide emergency loans to SME’s and households thus forcing money into the economy, will this trigger inflation.
- With high unemployment levels, wage inflation is currently not an issue.Once we have full employment this could be a significant driver for inflation.
- The increase in tariffs for imported goods caused by a trade war between the US and China or through a no-deal Brexit for the UK, has not led to higher pricesSo, has not impacted inflation (but watch this space….)
- Everyone is focused on stimulus, not how we pay for the stimulus.
When the Covid crisis is finally under control, a constant increase in taxes to reduce budget deficits, could lead to spikes inflation spikes.
Gold: Buy, Hold, or Sell?
For now, all we can do is monitor the five points raised above and track how Covid-19 is influencing inflation and prices. If inflation starts kicking in, gold prices will most likely rise. We will also have to wait until the aftermath of the crisis to see how Government policies evolve and how these new policies impact the global economy. Until then, I think prices will consolidate and keep trading in a narrow range.
From a technical perspective, we also must monitor the major support zone around 1850 / 1860. So far, this support has firmly held. The 200-day Simple Moving Average will also likely act as key support going forward. Until these two technical indicators show me failing signs, I would not sell gold from here.
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