With barely two weeks before President-elect Joe Biden takes the oath of office and takes over from President Trump, he is expected to announce COVID-relief checks of $2,000 for every American. That announcement might be his first order of business which might also be gold bulls’ biggest hope yet in getting the market to the levels that they want.
The challenge comes since it is not just the gold market that is targeting the trillions of dollars that the Biden administration has promised to spend over the next 12 months to combat the health crisis. Bitcoin, stocks, and the US bond yields are all flying to record highs in recent days as investors seek all ways and places to grow their money.
Investors are seeking lucrative investment opportunities amid the current economic uncertainty and increasing federal debt which has shown no sign of slowing down just like the virus.
High Competition For Investor Attention
Currently, the competition for investor attention means that the gold market may have to wait longer to reach its desired highs. In this first week of 2021, its price action was a perfect display of gold’s recent history: A powerful rally happens, to the magnitude of $50 per ounce, before the onset of volatility and retracements manage to take things back to where they started or even slightly lower.
For several months, it was just the dollar that acted as the main catalyst for gold’s setback. Until it collapsed recently to near 3-year lows, which has become quite sticky, the dollar’s strength in the second half of 2021 often came heavily at the expense of gold.
Taking a look at the growing US debt that is forecasted at $3.8 trillion in 2021 and growing, the relative strength of the dollar normally defied logic. All that is happening despite the notion that the dollar is a reserve currency and a haven in its own right.
Now, a new rival has come up against gold, Bitcoin. The flagship crypto exploded above $40,000 on January 7 and more institutional investors are sinking their money in the nascent market.
The chief executive of Social Capital, Chamath Palihapitiya, told CNBC that the cryptocurrency might go to $100,000, then $150,000 and later conquer the $200,000 level. He was answering a question on how much further he thinks the bitcoin rally could reach. But, he said it is hard to give a time horizon for these milestones due to the hyper-speculative nature of cryptos.
Cryptocurrencies Are Attracting Some Of The Gold Investors
A senior market analyst at New York’s OANDA, Ed Moya, explained that many institutional investors that may normally be investing in gold markets were now shifting onto the crypto space too. He explained:
“The bitcoin bubble is attracting tremendous widespread interest and that will hinder some of gold’s longer-term appeal.”
Last year, when gold was surging to record highs above $2,070 per ounce, investors who longed the yellow precious metal in August might have laughed if anyone told them that the next peak in this market would not come for another six months or more.
But, Tuesday’s Senate victory by the Democratic Party came around six months after that August 7 record highs. With that victory, Biden’s administration can now issue without hindrance the stimulus that is quite important to gold.
Fundamentals In Gold Are Still Great
Notwithstanding the developments that arise in the cryptocurrency space, the great news for the gold bulls is that Joe Biden has already highlighted that he wants up to two stimulus packages for 2021 to mitigate the economic malaise expected to continue from the COVID-19 pandemic.
2020’s two stimulus packages by President Trump’s administration, issued by the Republican fiscal hawk Mitch McConnell, reached around $4 trillion. Biden can now do a lot more with the Democrats controlling all of the three legislative ‘houses’ namely the House of Representatives, the White House, and the Senate.
If that scenario is not great enough for the gold bulls, the Federal Reserve is expected to be on standby to pick up any slack that develops in the capital market liquidity and offer lending funds for firms that may require funding if the business conditions do not recover convincingly in the coming months.
All that is beside the Fed’s pledge to maintain the US rates at near-zero for as long as possibly necessary while simultaneously purchasing tens of billions of dollars of bonds every month to ensure that the economy is always churning.
This combined fiscal deficit/debt that might be created and the need to hedge that with haven assets like gold is what is causing all the excitement for the people who want to long the yellow metal.
Bitcoin Use Is Growing
Yet, bitcoin is generating a lot of excitement but of a different kind which is changing more skeptic investors into believers. Signs are already starting to show that bitcoin is on the verge of evolving beyond its use as a hedge.
PayPal’s (NASDAQ: PYPL) chief executive officer has said that its platform’s users can now use cryptos available on PayPal as a:
“funding source later this year to buy at any of our 28 million merchants … they promise to use modern technology to enhance the utility of payments.”
In October 2021, PayPal, with its over 300 million active users said that it had joined the crypto market. It now lets users buy and sell bitcoin and other cryptos using their PayPal accounts.
The growing demand from users has seen the buying and selling volumes of bitcoin on PayPal surge by over 500% in the past two months; transaction volumes are also rising from about $20 million in November to over $100 million, based on Paxos-owned ItBit, PayPal’s exchange provider.
But, unless it gains mainstream universal acceptance, the volatility in bitcoin that was easily three times or more that in gold will turn off investors who may prefer stability and the relative liquidity of gold, according to OANDA’s Moya. He added:
“Gold is consolidating between $1900 and $1950, but eventually the prospects of more monetary and fiscal stimulus should have the bullish trend reassert itself.”
Technically, gold appears to have run into new challenges as explained by chartist Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. Dixit said that the spot price of gold that reflects trades in bullion, failed to breach $1,960 at January 6’s high and it has traded as low as $1,901 since then.
Gold Technical Range From $1,892 To $2,127
Nonetheless, if gold failed to surge out of that range soon, it risked falling to about $1,838, Dixit said, explaining:
“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.”
On a positive note, a major breakout above the $1,965 – $1,970 levels can open the flood gates to the most desired $2,000 levels. However, breaching the August record high of $2,089 might take longer. Dixit concluded:
“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.”