- Gold erased initial gains after the inauguration of President Joe Biden, pressured by a firmer dollar while being supported by its appeal as a hedge against inflation due to a proposed U.S. $1.9 trillion stimulus package.
- Gold was down 1 percent at $1,851.50 per ounce on January 22, weighed by the strengthening dollar, which can potentially cap bullion in coming sessions.
- Gold was supported by expectations for the stimulus package in the United States: a huge cash injection to the economy would raise inflationary fears, increasing the appeal of the precious metal to savers.
- Gold was also underpinned by tightening lockdowns in countries such as Germany and France, and new restrictions against Covid-19 in China, as well as by comments from the U.S. Federal Reserve indicating no changes in interest rates.
Tougher lockdowns augur for a slower recovery of the global economy.
Gold prices risked further downside due to possible delays in implementation of the stimulus package proposed by Biden, who took office on January 20.
The short-term economic perspective still looks troubling. People are getting scared, and they are raising cash. The market remains vulnerable,” said Kitco Metals global trading director Peter Hug.
“Biden’s proposal of $1.9 trillion is going to help, but again it is a little down the road. He first will need to …get the stimulus passed through the House and the Senate. At the same time, he is potentially going to try to impeach President Donald Trump. It will get messy.”
Economic data pointed to a significant slowdown early in 2021 due to the introduction of more lockdowns, dragging on economic recovery.
Key to the outlook for gold prices in 2021 will be the United States, wrote Lawrie Williams, precious metals commentator for bullion dealer Sharps Pixley.
“The outgoing President will be leaving in a degree of ignominy, fighting a unique second impeachment call. This could well only further incite the political divisions, whether or not it is successful,” Williams added.
Worries over the economic outlook weighed on the pound, but the UK currency received support from a less damaging lockdown in the UK in November than expected.
The pound was also buoyed by fading expectations for any near-term shift towards unprecedented negative interest rates in Britain following comments by Bank of England governor Andrew Bailey.
The pound could gain ground against the dollar helped by a speedy national rollout of vaccinations.
Any strengthening of sterling against the dollar in the coming weeks could stimulate buying opportunities for gold by UK savers, but analysts will closely watch out for any hurdles in the introduction of the Biden stimulus plan.
Frequently asked questions
How has the price of gold reacted following the inauguration of Joe Biden?
Gold prices erased their initial gains after the inauguration of President Joe Biden, dropping by 1 per cent to reach $1,851.50 per ounce on 22nd January. This downward pressure has been largely driven by a strengthening US dollar, which analysts warn could continue to cap any potential gains for bullion in the upcoming trading sessions.
However, the precious metal has also found some crucial support. Investors are turning to gold as a hedge against inflation, spurred on by the expectation of a proposed $1.9 trillion US stimulus package. Despite this support, experts warn that the market remains highly vulnerable to further downside risks. Delays in passing the stimulus package through the House and the Senate, alongside a troubling short-term economic outlook, are causing some anxiety, leading many nervous investors to raise cash instead of holding assets.
Why is the proposed US stimulus package expected to support gold prices?
The proposed $1.9 trillion US stimulus package is expected to support gold prices because it represents a massive cash injection into the American economy. When such a substantial amount of capital is introduced, it typically raises concerns about rising inflation. Since gold is traditionally viewed as a reliable hedge against inflation, these fears increase the metal’s appeal to savers looking to protect their wealth.
Nevertheless, the positive impact of this stimulus is not yet guaranteed. Before the funding can be released, President Biden must first navigate the legislative process to get the package successfully passed through both the House and the Senate. Analysts point out that this process could be delayed and complicated by political distractions, including the potential impeachment proceedings of Donald Trump, which may create a messy legislative environment and stall the economic relief.
What global economic factors are currently influencing the gold market?
The gold market is being strongly influenced by tightening pandemic lockdowns across major European countries, including Germany and France, alongside new Covid-19 restrictions introduced in China. These tougher lockdown measures are fueling fears of a much slower recovery for the global economy, which has subsequently increased the appeal of gold as a safe-haven asset during times of uncertainty.
Additionally, the market is reacting to recent communications from the US Federal Reserve, which has indicated that there will be no immediate changes to interest rates. These factors, combined with a significant slowdown in economic data at the start of 2021, are shaping investor sentiment. While the broader economic outlook remains troubled and encourages cash-hoarding, the combination of low interest rates and ongoing economic disruption continues to underpin the intrinsic value of precious metals.
How is the political situation in the United States affecting gold?
The political situation in the United States is playing a key role in the outlook for gold prices. The outgoing President, Donald Trump, left office facing a unique second impeachment call, which precious metals commentators suggest could further incite deep political divisions within the country. This political instability contributes to a highly volatile market environment where investors remain cautious.
Furthermore, the political focus on impeachment could delay the implementation of President Biden’s proposed $1.9 trillion economic stimulus package. Because the stimulus must be debated and passed through both the House and the Senate, a messy political environment could stall progress. Any such delays are viewed as a downside risk for gold, as they prolong economic uncertainty and prevent the immediate inflationary pressures that typically drive investors toward precious metals.
What factors are impacting the British pound and gold buying in the UK?
The British pound has been influenced by a mix of domestic economic data and monetary policy expectations. While general worries about the economic outlook have weighed on the currency, it received support because the UK lockdown in November was less economically damaging than originally expected. Furthermore, expectations of a near-term shift toward negative interest rates have faded following comments from Bank of England governor Andrew Bailey.
The pound could also gain ground against the US dollar due to the speedy national rollout of Covid-19 vaccinations. For UK savers, any potential strengthening of sterling against the dollar could be beneficial, as it could stimulate attractive buying opportunities for gold. However, local buyers will still need to monitor the international market closely, particularly regarding any legislative hurdles facing the Biden stimulus plan in America.
