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Gold is looking for an excuse to go higher...

…And that excuse is the devaluation of the dollar. Gold is not immune to fundamental events. However, recently has been sideways for the most part of two months.

Gold and the election

A theme revolving around Biden's win is the dollar's devaluation, with many banks calling a drop in the dollar if Biden is elected. Given the historical precedent of Gold rallying on dollar weakness, a Biden win may push the yellow metal higher. Furthermore, a sell-off in the equity markets on a Biden win may give Gold's tailwinds as investors and traders switch to risk-off.

Commerzbank Analyst Daniel Briesemann stated that the "Market will not doubt follow the talks in Washington very closely," and that "Gold could profit in the event of a deal because the U.S. dollar would presumably be in less demand then and would probably depreciate".

It is a simple recipe that revolves around the dollar's devaluation and its historically inverse relationship with Gold. Stimulus and Support from the U.S. government and the Federal Reserve are likely to depreciate the dollar, pushing Gold higher. Furthermore, a Biden win may incentivize a further sell-off in the U.S. dollar, again, pushing Gold higher.

Gold technicals are looking strong

Gold technicals seeing a rally an all time highs

Currently, Gold is sitting at $1,922 an ounce – Right on a very strong support/resistance level. It has been on a strong upwards trend from a drop in the previous symmetrical wedge. Furthermore, the highs to the trend's low constitute a full Fibonacci retracement. A break of the $1,958 level, which is another strong support/resistance level and is right on the 50% fib retracement level, before the election, may see Gold rally back to its all-time highs and seek further targets of $2,204.

However, a Trump win on election day may see a sell-off in Gold, with prices breaking the upwards channel down back to a full retracement to $1,847

Are you looking at Gold?

Is it Gold's time to shine?

Gold is up nearly 3% in the past couple of days as President Donald Trump's hospitalization due to him contracting the Coronavirus shook the markets. Like many times this year, Gold has been an anchor on volatility, providing stability in a portfolio when markets dive. However, what about the factors that are usually discussed to propel Gold past its previous highs?

We talked about the tailwinds for Gold previously; its link with inflation, dollar devaluation, future volatility, and positive sentiment. Are we starting to see these catalysts come into fruition?

Dollar Index up 2.6% on volatility in the past couple of days

Inflation

In short, people believe that Gold is a good hedge for inflation instead of holding the U.S. dollar or U.S. denominated bonds. This because Gold is said to hold value better than the U.S. dollar does in inflationary periods.

Inflation Rate has fluctuated above and below the Fed's mandate of 2%

In the past ten years, we saw inflation fluctuate between 1.5% and 2.5% as the Fed attempted to maintain its mandate of 2% inflation each year. However, with the Fed's new "tool," allowing inflation to hover above their 2%, investors and traders are looking out for inflation to creep up in the future slowly. Furthermore, the Federal Reserve's balance sheet continues to creep up, with them vowing to use all their tools at their disposal to spur the American economy, has the implicit consequence of producing inflation.

So far, we've seen inflation come up from its March lows when the Coronavirus started to hit the economy. It is currently sitting at around 1.7%, from 1.2% in March.

Are we starting to see the catalyst for inflation for Gold? In the current environment, No. Economic activity would need to pick up to relatively normal levels for inflation to spike. However, once a vaccine is on the Horizon, be prepared to look at this catalyst repeatedly.

Dollar De-valuation

On the face of it, the dollar index is only down around 3.2%. However, from its March Highs, the Dollar Index is down around 8.8%.

Dollar Index over 20 years

Ever since the Dot Com Bubble, we've seen the Dollar lose over 40% of its value between 2002 and the Global Financial Crisis in 2009. Ever since then, it has never regained the highs seen in 2002 since. Analysts believe if the Federal Reserve continues to prop up the economy with unprecedented quantitative easing and low rates, we may see the Dollar hit levels similar to that in 2009, down around 30% from current levels.

Interestingly enough, attention has been placed on the Federal Reserve on the devaluation of the Dollar. However, there have been many macroenvironmental factors pre-Coronavirus that have been headwinds for any appreciation of the Dollar, such as the historically low-interest rate incentivizing spending instead of saving, and public debt continuing to skyrocket.

We experienced a devaluation of a similar magnitude between the 1970s and 1985, and between 2002 and 2009, where the dollar index fell double digits. However, current saving rates and public debt were relatively higher than what it currently is.

Are we starting to see the catalyst for the devaluation of the U.S. dollar for Gold? Most likely. The pre-Coronavirus factors have been weighing on the Dollar's firm valuation – The Fed's stimulus may be the nail in the coffin.

Volatility in the markets

Oh yes sir boy – with the Coronavirus showing that it does not discriminate after it infected the President of the United States and multiple world leaders in the past year, markets have been all over the show. For example, in the past two days, Brent Crude has experienced wild swings, down 5% yesterday, and now up 6% today.

With the elections coming into swing, alongside Coronavirus shocks just like the one we had with President Trump, are we starting to see the Catalyst of Volatility for Gold? Most certainly. If this is your premise for going long Gold, this may be the optimal time to enter that trade.

Positive sentiment for Gold

Over the past year, we've seen a legendary Gold bull run, primarily due to investors and traders looking at historical tailwinds for Gold and identifying that those factors may be on the Horizon. Furthermore, the barrier to entry for trading investing for retail traders has become non-existent due to the recent "game-ification" of the investing and trading world. Therefore, an influx of retail money has plowed in Gold-Backed ETF" s in the past year, pushing the yellow metal prices higher.

Are we starting to see the catalyst of positive sentiment for Gold? Well, we have already seen it. Since the start of the Coronavirus, there has been much love of the yellow metal. And it seems like that love is still there, so we can say that Gold's catalyst is still ongoing.

Gold: Soft headwinds, strong tailwinds

With not many headwinds for Gold, and a multitude of future and ongoing tailwinds, this is something you should be keeping an eye on.

Gold hasn’t been itself lately

There was this substantial rise in Gold in July. Touted as the "safe haven," many reasons were stated as the reasons for Gold's rise. Inflation, currency debasement, risk-off, etc.

However, I believe we saw three different types of correlations in Gold this year. The first one was the "risk-off" trade. Investors and traders buy up Gold during the equity rout.

The second period combines two very similar mindsets in investment in Gold. The first one can be associated with "institutional money," quoting currency debasement and inflation. The second one comes from retail investors, who have been plowing money into Gold ETF's such as GLD, quoting what institutional investors stated. This pushed a strong bull rally in Gold, as investors and speculators press onto the yellow metal alongside a risk ON market.

Now the gold dynamic has taken a new personality. We saw substantial swings in the equity markets in the last two weeks, with the equity markets diving as of late. However, Gold entered a consolidation – not making the "risk-off" moves we saw earlier this year. This is after Gold sold off near the $2,100 market as investors feared the bull run for Gold had run its course. Is the Gold's silence a sign of more things to come? What other things can we deduce from these three different correlations?

Gold in Blue, S&P 500 in Orange

The silence in Gold highlights its bull run was more on positive sentiment, not the risk off-trade.

The silence during this period, where Gold is supposed to be the outperformer, suggests that the interest in Gold was due to more of a speculative Bull bull run, disguised as the "save haven" trade.

The stretched valuation in Gold may favor bonds in the safe-haven trade

The bull run giving Gold new highs has insinuated investors' minds that Gold is overstretched. Safe-haven assets are supposed to have an inverse correlation with risk-off assets. However, Gold as not exhibited that in the past couple of months. Nor has it exhibited risk-off, "safe haven" characteristics either. Furthermore, safe-haven assets should not have the stigma "oh, its overstretched" – Bonds don't have that stigma or cash.

However, another explanation could be that Gold has been right all along?

An explanation to the rally could be that investors were worried about the potential selloff due to equities' rallying. Therefore, when equities did selloff, Gold was perfectly priced. This is on top of institutional money and general interest in the metal citing devaluation and inflation.

Whatever the reason is, the mentality of whether Gold is overstretched or not should be a trait safe-haven assets should have. If you're looking for a legitimate safe-haven asset, you may want to look in bonds. Or better yet, hold some cash to take advantage of the dip.