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Gold Price Outlook Bullish as Liquidity Gushes, Recession Looms

GOLD PRICE OUTLOOK REMAINS BULLISH AS GLOBAL GOVERNMENTS, CENTRAL BANKS FLOOD MARKETS WITH LIQUIDITY TO COMBAT CORONAVIRUS RECESSION RISK

  • Gold prices spiked higher last week to a fresh 7.5 year high and helped the precious metal extend its year-to-date gain to 13%
  • Gold price action has gained ground on the back of surging central bank liquidity and ‘sticky’ market volatility as coronavirus recession risk looms
  • Gold outlook remains bullish in light of its fundamental backdrop, but bullion might face short-term headwinds if inflation expectations plunge

Gold price action climbed 2.7% over the last five trading sessions and pushed XAU/USD to its strongest level since November 2012. Gold gains follow the near-vertical rise in asset purchases recently made by central banks, which has caused their balance sheets to balloon, as they attempt to calm market angst with baffling amounts of liquidity and other stimulating monetary policy measures.

Gold MIXED

Data provided by

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Change inLongsShortsOI
Daily-3%5%-1%
Weekly11%0%8%

Gold prices have ripped higher by more than 15% since the Federal Reserve announced on March 23 that it will buy Treasury securities and agency MBS “in the amounts needed to support smooth market functioning.” This development adds onto ‘not-QE’ measures adopted by the Fed last September when the FOMC expanded its repo market operations.

GOLD PRICE STRETCHES HIGHER AMID CENTRAL BANK BALANCE SHEET EXPLOSION

Gold Price Chart Gold Forecast Fed Balance Sheet

The Federal Reserve balance sheet has already exploded past the $6.5 trillion mark, an increase of 75% since August 2019, and the ongoing bulge in Fed asset purchases stands to fuel more upside in gold price action. There is a risk that gold might face some turbulence over the short-term, however. Market participants are expecting a monetary policy update from FOMC officials, led by Fed Chair Jerome Powell, this coming Wednesday, April 29 at 18:00 GMT.

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As such, the upcoming Fed meeting could correspond with a major move in XAU/USD price action if their commentary prompts traders to reassess their outlook for gold or the US Dollar. Likewise, the European Central Bank, or ECB, is due to provide markets with its own monetary policy update on Thursday, April 30 at 11:45 GMT.

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Gold prices could extend higher if the Fed and ECB suggest they will keep their printing presses greased up, or make deeper interest rate cuts, but the precious metal may come under pressure if they hint at their monetary policy arsenals are running low on ammunition.

GOLD PRICE BUOYED AS VOLATILITY LINGERS, CORONAVIRUS RECESSION RISK LOOMS

Gold Price Chart Gold Forecast XAUUSD Volatility

Chart created by @RichDvorakFX with TradingView

That said, gold is anticipated to continue its broader bullish trend as coronavirus panic spurs volatility as well as demand for safe-haven assets. Primarily catalyzed by the coronavirus lockdown, the US unemployment rate has probably skyrocketed above 15%. This is considering initial jobless claims snowballed to more than 26 million over the last five weeks. Meanwhile, some economist forecast the Eurozone unemployment rate topping 30%.

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Even despite global governments and central banks responding to the economic crisis with unprecedented amounts of stimulus, a coronavirus recession is likely unavoidable, which stands to keep gold price action bolstered. Also, sweeping demand for bullion has made it difficult for investors to obtain the precious metal in physical form, and threatens to exacerbate the gold rally.

GOLD PRICE MIGHT FACE HEADWINDS FROM FALLING INFLATION EXPECTATIONS

Gold Price Chart Inflation Expectations Federal Reserve Coronavirus Recession

Although medium-term and long-term gold price outlook remains bullish, the precious metal could slide lower if inflation expectations plummet again. If this materializes, it would likely follow another widespread market selloff where safe-haven currencies, such as the US Dollar, typically outperform gold.

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On that note, as FOMO-trading builds upon investor complacency, traders look increasingly exposed to the next potential mass liquidation and ‘dash-for-cash.’ This is seeing that the stock market rally is likely at its wits end. Nevertheless, intermittent weakness in gold, if experienced, could offer attractive opportunities for gold bulls with wider trading time frames.

Keep Reading: Complacency Builds as VIX Crumbles, Crude Oil Volatility Ebbs

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight