By Barani Krishnan
Investing.com - Gold’s hedging side came through on Monday as it rallied to near mid-$1,800 levels on the Biden administration’s move to push a $1.9 trillion coronavirus relief plan through Congress — with or without bipartisan support.
On a day when commodity price screens across the board flashed green in unison like pinball machines on a win, gold joined the party in the energy and most metals and agricultural markets, swayed by the benefits of stimulus money and the near-term pop that could give to the economy.
It was indeed a welcome relief to longs stunned by the yellow metal’s collapse last week to 10-week lows of just under $1,785 that came on the back of a spiking dollar and U.S. bond yields.
Both the Dollar Index and returns from the benchmark U.S. 10-year Treasury note surged again on Monday before falling back, along gold to continue on its recovery path.
Gold’s quality as a haven had been in question since August, when it came off record highs of above $2,000 an ounce to hover at $1,900 first, then fall deeper into $1,700 and $1,800 territory on Covid-19 vaccine breakthroughs that boosted economic rebound hopes instead.
Monday’s rebound restored some of the fundamentals that had evaded gold — particularly its standing as a hedge against inflation — although it remained some $255, or 12%, below the August record high of nearly $2,090.
“Gold almost had its back broken, but the reflation trade just saved it,” said Ed Moya, senior market strategist for OANDA in New York. “Gold is rallying from a two-month low as Biden’s massive $1.9 trillion plan is about to become a reality.”
“The economic recovery is weak, and prospects are growing that more will be done once we get past this first $1.9 trillion plan. The reflation trade is happening a lot faster than-expected and that should keep inflation expectations rising.”
But Moya also cautioned that the yellow metal’s technical standing was still weak, and needed to push higher in order to not break down again.
“Gold is not out of the woods just yet and needs to capture the $1,850 level before the end of the week, otherwise a death-cross formation could trigger a significant wave of selling pressure.”
Gold’s test could really come later in the week, particularly on Wednesday, when Federal Reserve Chair Jay Powell speaks about the labor market at a webinar hosted by the Economic Club of New York.
Wednesday will be a packed day for gold. Market watchers will be paying close attention to the U.S. Consumer Price Index data for January, amid growing expectations that an uptick in inflation could be larger and longer lasting than the Fed is anticipating.
U.S. Treasury investors are betting on inflation to rise if the economy continues to progress in the second half of this year, after contracting in 2020 at its deepest pace since World War II. The prospect of a new coronavirus relief package is adding to inflation expectations.
Also due on Wednesday is the U.S. Federal Budget Balance and wholesale inventories data. On Thursday, initial jobless claims numbers will be published.