The short term bear case

The general consensus among most analysts is for gold upside in the short and medium term. A recent piece on Bloomberg’s Market Live Blog is making a case for a gold correction in the near term. The logic for the correction was as follows:

  • The central bank stimulus has now been priced in and the reflation trade is now faltering.
  • The financial system is not collapsing, yet core gold bullishness is based on the fear that central bank liquidity will devalue fiat currencies and lead to inflation combined with safe haven demand.
  • Therefore, recent bullishness is over done and it is reasonable to expect some correction in gold over the coming weeks

The bullish gold case

On the same day Bloomberg’s Marekt’s Live blog also had a piece arguing for more gold upside. The logic of that pieces was as follows:

  • The Rising COVID-19 cases in the US will further ncrease the economic damage already inflicted.
  • This above point means the odds for further losses have risen for shares and more Fed stimulus can be expected to come. Both should aid gold upside.
  • The Fed have already made it clear they are willing to increase stimulus with Fed Vice Chairman Richard Clarida saying the Fed is prepared to take additional steps if necessary.

So, there we have two opposing views on gold. So, what is your take on gold? The medium term picture for gold upside remains in tact, especially with record low interest rates and more stimulus potentially on the way with rising COVID-19 cases.

However, in the short term it is a more open question whether we will see more upside in gold or whether a correction is due. Remember that heavy stock selling has also been weighing on gold recently, so that could hinder higher prices. If gold does indeed correct how far down could it fall? The $1680 is obvious near term support and bulls would be expected to reload at that point in the current climate. It was telling that the article making a case for near term gold bears was not making a case for general medium term gold bearishness. The bullish picture remains in place, even with a short term bear. To invalidate the bullish outlook for gold the market would need to see news of a successful vaccine for COVID-19.