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In the run-up to the US presidential election, gold rose on expectations of aggressive fiscal stimulus, which would create a reflationary environment and help lower real Treasury bond yields. With the absence of the blue wave which may significantly decrease the scale of additional assistance to the economy, the precious metal fell into an avalanche of sales. Currently, it is under pressure due to the expected vaccination of the population by investors and the recovery of global GDP. In this situation, US debt market rates go up, and XAUUSD quotes go down.
For gold, the external background is important. A weak economy and accelerating inflation is one thing, but a strong economy and the unwillingness of consumer prices to accelerate is another. In the second case, the precious metal usually comes under pressure. Moreover, there is no place for it in investment portfolios. According to EPFR Global, thanks to positive news about vaccines, net capital inflows to equity-related funds in the previous week amounted to $44.5 billion, and net outflows from band-oriented funds totaled $4 billion. The yield on US Treasury bonds jumped to 0.9%, although it has hovered near the 0.6% mark in recent months.
Dynamics of capital flows in ETF:
An additional blow to gold may be caused by the correction of US stock indexes. The S&P 500 has hit record highs thanks to news of successful COVID-19 vaccine trials, but there is no solid foundation under the US stock market. American industrial production is 5.6% lower than before the pandemic, and retail sales in October grew at the slowest pace in six months. It is difficult to expect success if the number of infections and hospitalizations in the US reaches record highs, and aid programs end, which leads to a decrease in consumer spending and GDP. According to Jerome Powell, even with the good news about vaccines, the US economy has a long road to recover to previous levels.
According to research by BofA Merrill Lynch, the share of cash in the portfolios of the world's largest investors has fallen to a critical 4%, which usually signals a potential correction in the S&P 500. The Bank recommends that its clients fix their profits on the news about vaccines.
Dynamics of the S&P 500 and the share of cash in portfolios:
If the US equity market starts to sell off, which, in my opinion, is quite justified due to excessive and premature euphoria about the victory over COVID-19, the demand for safe-haven assets, including the dollar, will increase sharply. Bad news for the precious metal, which is quoted in the USD.
Technically, the Broadening Wedge pattern continues to play out on the daily chart. The failure of gold to stay above $1,900 and $1,882 and then return to the levels of $1,882 and $1,872 per ounce, respectively, should be used for sales as part of an aggressive strategy. Conservative suggests that the signal for the formation of shorts will be a breakout of support at $1855-1857.
Gold, daily chart:
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