By Sergei Dehtiarov,  Head of Brokerage, NBH Markets
By Sergei Dehtiarov, Head of Brokerage, NBH Markets

Gold outlook: Corporate earnings and fiscal and monetary policy in focus

Gold price has risen by almost 2% in the past month while the dollar index has risen by more than 4%. This price action was mostly due to global central banks and policymakers. The two have moved swiftly to support the economy.

Gold price has risen by almost 2% in the past month while the dollar index has risen by more than 4%. This price action was mostly due to global central banks and policymakers. The two have moved swiftly to support the economy. 

In the US, the federal government has provided more than $2.2 trillion in financing while the Federal Reserve has committed to an open-ended quantitative easing. This has seen the balance sheet increase more than $2 trillion in the past few months. On Thursday, the bank announced that it was starting a $2.3 trillion fund to finance small and medium-sized enterprises. 

The federal government has also committed to provide financing to people and businesses. The government has initiated a fiscal stimulus package worth more than $2.2 trillion. Talks are going on in congress to add more to these funds. Nancy Pelosi is requesting more than $1 trillion while Donald Trump has talked about investing more than $2 trillion in infrastructure.

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Source: Trading Economist

The result of all this has been a sudden increase of the country’s debt. According to the US Debt Clock, the federal debt has grown to an unprecedented $23 trillion. The debt was less than $10 trillion in 2009. The situation has been made worse by the increased government spending, which has led to trillion-dollar deficits.

The fiscal and monetary responses have had an impact on the US dollar and gold prices. Another factor is that gold mines have been shut in most countries as companies respond to lockdown measures from the government. The same has happened to gold refiners, which has led to a shortage of physical gold. This has led to a surge in gold bar prices. 

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Historically, gold has been viewed as a safe haven that rises in terms of risks

The coronavirus pandemic has also contributed to more demand for gold. Historically, gold has been viewed as a safe haven that rises in terms of risks. To some extent, the metal has played this role during this crisis. So far this year, the metal’s price has soared by more than 10% while the S&P500 and the Dow have dropped by more than 15%.

In the next few days, participants in the gold market will focus on the coronavirus pandemic. A flattening of the curve and reopening of the economy could be net-negative for gold since most people will go back to stocks. If the status quo remains, global central banks and governments could be forced to continue with unconventional fiscal practices. These are risky and could increase debts to unsustainable levels. In the coming weeks, we will receive interest rates and monetary policy decisions from key banks. The Federal Reserve is expected to make its decision on April 29. The Bank of Canada will announce its decision on Wednesday April 14 while the ECB and BOE will deliver their decisions on April 30 and May 7 respectively.

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In the coming weeks, we will receive interest rates and monetary policy decisions from key banks

Another key driver for gold prices will be the upcoming earnings season, which will start on Tuesday April 13. The season could send signals of how deep the earnings recession will be. The season will also showcase the impact of the shutdowns on gold companies like Newmont and Barrick Gold. Signs of a deeper earnings recession could lead to more inflows into gold and other safe-havens like bonds and the Japanese yen. 
 
Technically speaking, momentum appears to be on gold’s side. On the four-hour chart shown above, the XAU/USD pair is attempting to retest the previous high point of 1,702. The pair is above the short and longer-term moving averages while the RSI has moved into the overbought territory. The index may continue to rally but it is possible that it will find some resistance when it hits 1,700.

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