The negotiations on the support package in the United States may be positive for gold - HSBC

31.07.2020 21:14
Fiscal negotiations in the US should be positive for gold, which can consolidate the recent growth in the short term. Overall, according to precious metals analysts at HSBC, the price of gold is still well supported in the long term by low yields:

"It is clear that the FOMC continues to view the economic Outlook as extremely uncertain, and that the trajectory of the economy will depend heavily on the development of the COVID-19 pandemic. The ongoing monetary stimulus from the fed and the extremely uncertain Outlook for the economy may support gold.

The fed said it will extend swap lines in USD with nine Central banks until March 31, 2021, to serve as support for markets and help planning by other Central banks. The fed also has permanent swap lines in the us dollar with the Bank of Canada, the Bank of Japan, the Bank of England, the ECB, and the SNB. To some extent, this helps convince the world of an adequate supply of USD, and reduce financial stress and uncertainty. This should be negative for gold.

Gold may benefit from increased uncertainty coming from broad disagreements between Republicans and Democrats on the composition of fiscal stimulus, but also from expectations that a fiscal stimulus agreement will be reached. Thus, gold can consolidate some of the recent growth in the short term, especially if the new fiscal stimulus turns out to be positive for the dollar, from a cyclical point of view, instead of being negative due to less interest in "safe assets".

Low or negative real interest rates are probably the key to the growth of gold. When real yields in the US are low or even negative, investors do not have the opportunity cost of owning gold. In addition, negative real yields in the US are probably indicators of financial or economic stress, probably increasing demand for gold, focused on the "safe asset". Moreover, when real yields in the US turn negative, it can be negative for the USD, supporting gold in dollar terms. Gold is still well supported by long-term low yields."

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