COVID Fears, wage inflation will support prices next week

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COVID-19 fears are creeping back into the marketplace, with investors shedding risky assets and looking for safe havens like gold.

Sentiment in global financial markets started to shift late Thursday, as investors shed risk assets after news broke that a potentially dangerous variant of COVID-19 has emerged in South Africa.

“Risk assets are getting pummelled at the end of the week as a new Covid variant sparks fears of new restrictions and lockdowns,” said Craig Erlam, senior market analyst at OANDA. “The most worrying thing about the new strain at the moment is how little we know about it, with early indications being that it could be more problematic than delta.

Gold prices briefly pushed back above $1,800 an ounce early Friday morning as the CBOE Volatility Index ($VIX) spiked to a two-month high due to the new COVID-19 fears. However, gold’s gains have been short-lived. December gold futures last traded at $1,792.30 an ounce, down more than 3% since last Friday.

Gold has held up well as the Dow Jones Industrial Average sees its most significant one-day decline so far this year. The index dropped 905 points in its shortened trading session Friday.

It’s anyone’s game for gold next week as prices remain below $1,800
However, the precious metal still has a lot of ground to cover after giving up most of its gains from its breakout rally three weeks ago.

Looking ahead, some economists and market analysts have said that the spread of the new variant could provide some support for gold if it starts to impact economic activity and the future direction of monetary policy.

Because of rising inflation pressures, markets are starting to price in more aggressive monetary policy action from the Federal Reserve. The CME FedWatch Tool shows that markets already expect the first rate hike to come in June and see three rate hikes this year.

However, some of those expectations have been paired back in the wake of the new COVID-19 scare.

“The need for continued public health measures, and for third doses, will mean a longer wait to end the remaining dent to services activity, but also a longer wait to heal the inflation and goods production shortfalls tied to Covid-related worker absenteeism,” said economists at CIBC.

The new variant has already impacted global travel. The European Union has banned flights from South Africa. Other European nations have gone even further, banning flights from South Africa and African countries. The U.K. has also banned flights from South African and its neighboring countries. The Canadian Government announced a travel ban on foreign nationals coming from Seven South African countries late Friday afternoon.

Along with the new variant, Europe continues to deal with a new wave of coronavirus infections. Countries like Germany are looking to enact new lockdown measures.

Erlam said looking at gold’s price action on Friday demonstrates that the precious metal is doing what it is supposed to do. He added that the new COVID concerns will continue to support gold prices.

“In times like this, we get a true sense of what investors consider to be real, reliable safe-havens,” he said. “This should still be bullish for gold as, at the very least, central banks will delay tightening until they have a better idea of the risks to the economy. Allowing inflation to run hot unaddressed could increase the hedge appeal of gold again, particularly in these uncertain times.”

Commodity analysts at TD Securities also sees potential for gold to attract new bullish momentum.

“The safe-haven bid could potentially be a catalyst for the yellow metal to break out of its trading range, given TD Securities’ forecast of slowing growth and inflation next year which suggests that market pricing for Fed hikes may ultimately prove too hawkish,” the analysts said.

Although the gold market is well off its lows seen earlier in the week, some analysts note that a lot of technical damage was done at the start of the week. Even with Friday’s push higher, prices are below $1,800 an ounce.

Marc Chandler, managing director at Bannockburn Global Forex, said that while COVID-19 fears have helped the gold market cut its losses, he is looking for lower prices in the near term.

“Gold’s bounce stopped in front of 1816, a key retracement target. Provided this holds, my bias is lower, either on a recovery in rates or on a broad liquidation of commodities. I look for support around $1,776,” he said.

Watch wage inflation next week

Along with the growing COVID-19 fears, economists note that markets will also receive important economic data, including November’s nonfarm payrolls report.

The labor market has been a critical metric the Federal Reserve has been watching to determine how the pace of its normalizing process. Markets are expecting another 500,000 jobs were created in November. Wages are forecasted to grow another 0.4% after jumping 0.4% in October.

Daniel Briesemann, precious metal analyst at Commerzbank, said that while better than expected employment data could put some pressure on gold, he will be paying more attention to wage inflation.

“The Fed may be looking to raise interest rates, but if inflation continues to rise, that will mean real rates will remain negative, and that will be supportive for gold,” he said.

Jeff Weniger, head of equity strategy at WisdomTree, said that he also expects inflation to support gold. He added that no matter how many rate hikes the Fed can do, they will remain behind the inflation curve.

Powell and Yellen head to Washington

Along with Friday’s employment numbers, markets will be anxious to hear from both Federal Reserve Chair Jerome Powell and Secretary-Treasurer Janet Yellen as they testify in Washington Tuesday and Wednesday.

This will be the first time markets will hear from Powell after President Joe Biden nominated him to remain as the head of the U.S. central bank.

Levels to watch
According to some technical analysts, gold’s $1,800 an ounce level remains a critical psychological level to watch.

However, some say that prices have to push higher to attract new sustainable bullish momentum. Ole Hansen, head of commodity strategy at Saxo Bank, said he is neutral on gold until prices move back above $1,835 an ounce.

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