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Will Gold’s New Record High Be Delayed By Yields, Bitcoin?

By (Barani Krishnan/ 08, 2021 09:46
Will Gold’s New Record High Be Delayed By Yields, Bitcoin?
By (Barani Krishnan/   |  Jan 08, 2021 09:46
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With less than two weeks before he takes office to possibly announce COVID-relief checks of $2,000 for each American—in what could be his first order of business—President-elect Joseph Biden might be gold bulls’ biggest hope yet in getting the market to where they want.

The trouble is, it’s not just the gold market that’s eyeing the trillions of dollars that the Biden administration will likely spend over the next year or so to fight the pandemic. 

Stocks, bitcoin—even US bond yields—have all been hitting highs in recent days as investors look to every possible place to grow their money, amid the economic uncertainty and spiking federal debt that have shown no signs of abating, just like the virus. 

Competition For Investor Attention

The competition for investor attention means gold may have to wait longer to get to its desired highs.

This week’s price action was a classic display of the precious metal’s recent history: A powerful rally occurs, to the tune of $50 per ounce, before the onset of volatility and retracements take things back to where they began—or even lower.

For months, it was just the dollar that was the catalyst for gold’s setback. 

Until it caved recently to near three-year lows, that have proven a little sticky, the dollar’s vigor in the second half of 2020 often came at the expense of gold. Given the yawning US debt—projected at $3.8 trillion this year and growing—the dollar’s relative strength typically defied logic, despite the argument that the greenback as a reserve currency is a haven in its own right. 

Now, gold has another rival—bitcoin, which, on Thursday, surged to a record high of $40,000.

This digital currency is "probably going to $100,000, then $150,000, then $200,000," Chamath Palihapitiya, chief executive of Social Capital, told CNBC when asked about how much farther the rally in bitcoin could reach. He added, however, that it was hard to give a time horizon for the milestones, given the hyper-speculative nature of cryptocurrencies.

Cryptos Snaring Some Of The Gold Crowd

Ed Moya, senior market analyst at New York’s OANDA, said many institutional investors who might typically be going into gold were now hopping onto the crypto bandwagon as well. He added:   

“The bitcoin bubble is attracting tremendous widespread interest and that will hinder some of gold’s longer-term appeal.”

Last summer, when gold was at record highs of nearly $2,090 an ounce, investors long the yellow metal might have laughed if told that its next peak might not come for another six months at least. 

Yet, Tuesday’s Senate victory by the Democratic Party—which allows the incoming Biden administration to issue without impedance the stimulus so important to gold—came almost six months after that Aug. 7 record high.  

Fundamental Story In Gold Still Great

Notwithstanding the developments in the crypto world, the good news for gold bulls is that Biden has already hinted that he wants at least two stimulus packages in 2021 to override the economic malaise expected to continue from the pandemic. 

Last year’s two stimulus packages by the Trump administration, issued under Republican fiscal hawk Mitch McConnell, totaled about $4 trillion. With the Democrats controlling all three legislative “houses”—the White House, the House of Representative and the Senate—Biden will be able to do a lot more.

If that isn't great enough for gold bulls, the Federal Reserve will be on standby to pick up any slack in capital market liquidity and provide lending for companies that may need funding if business conditions don’t recover adequately in coming months. 

This is besides the Fed’s pledge to keep US rates at near zero for as long as necessary, while buying tens of billions of dollars of bonds a month to keep the economy churning. The combined fiscal deficit/debt that will possibly be created and the need to hedge that with safe-havens such as gold is what’s causing all the excitement for those long the yellow metal. 

Bitcoin Use Is Expanding Though

Yet, bitcoin is generating a buzz of a different kind that is converting more sceptic investors into believers.

Signs are already beginning to emerge that bitcoin is on the cusp of evolving beyond its use as a hedge. 

PayPal's (NASDAQ:PYPL) chief executive has said its users will be able to use cryptocurrencies [available on PayPal] as "a funding source later this year to buy at any of our 28 million merchants … their promise is to use modern technology to enhance the utility of payments."

In October last year, PayPal, with over 300 million active users, announced that it had entered the cryptocurrency market, allowing its users to buy and sell bitcoin and other virtual currencies using their PayPal accounts.

The strong demand from users has seen bitcoin buying and selling volumes on PayPal's platform rise by more than 500% in the last two months, with transaction volumes rising from around $20 million in November to more than $100 million, according to Paxos-owned ItBit, PayPal's exchange provider.

But unless it gains universal acceptance, the volatility in bitcoin—which was easily three times or more that in gold—will turn off investors who might prefer stability and the relative liquidity of gold, said OANDA’s Moya. He adds: 

“Gold is consolidating between $1900 and $1950, but eventually the prospects of more monetary and fiscal stimulus should have the bullish trend reassert itself.”

Gold Futures Weekly
Gold Futures Weekly

Charts courtesy of SK Dixit Charting

Technically as well, gold seems to have run into new challenges, said chartist Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. 

Dixit noted that the spot price of gold, which reflects trades in bullion, failed to breach $1,960 at Wednesday’s high, and has traded as low as $1,901 since.  

Gold Futures Monthly
Gold Futures Monthly

Gold’s Technical Range Wide, From $1,892 - $2,127

However, if gold did not climb out of that range soon, it risked falling to $1,838, Dixit said, adding: 

“The daily charts suggest support areas at the 20-Day Simple Moving Average of $1,887. This support itself has crossed over with the 50-Day Exponential Moving Average of $1,880 and is trying to intersect with the 100-Day Simple Moving Average of $1,892.” 

“While these areas can act as support over time, a sustained move below $1,880 may expose the metal to more severe bottoms of $1,850 and possibly even $1,838.” 

Gold Futures Daily
Gold Futures Daily
On the positive side, a strong breakout above the $1,965 - $1,970 levels can open the gates to the much coveted $2,000 levels—though breaching the August record high of $2,089 will possibly take longer, Dixit said. 

“If it gets to $2,075, it can create a first and immediate station at new let's say $2,127 to build towards a record.”

Will Gold’s New Record High Be Delayed By Yields, Bitcoin?

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Will Gold’s New Record High Be Delayed By Yields, Bitcoin?

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