Gold
The Fed pushed down interest rates, and the fiscal stimulus increased inflation expectations. In combination, it resulted in real interest rates plummeting to negative levels.
Gold's Correction
As real interest rates trended lower, gold moved higher. However since early August, gold has been selling-off. It peaked around $2,075 and is currently trading around $1,850.
There are several factors behind this move lower. For one, interest rates started moving higher as the economic recovery continues to surpass expectations. There's increased hopes that a self-sustaining recovery has begun. The second factor is Congress' continued ability to reach an agreement on a stimulus deal which leads to lower inflation expectations. Further, the vacancy on the Supreme Court adds more fuel to the already raging partisan tensions and further reduces the chances of both sides coming to an agreement before the election.
Gold's Outlook
These recent developments are another indication that gold prices are ultimately determined by real interest rates. It would have seemed probable that gold prices would do well as uncertainty increases especially with the chances of a succession crisis due to the upcoming election. Further, stocks have also been selling-off, and it would have seemed likely that gold would see some inflows as a safe haven asset.
Additionally, there has been a wave of secondary lockdowns in many places in Europe. And, there are increased concerns about another wave in the U.S. with colder weather approaching which will force more people indoors, schools reopening in many parts of the country, and many people eager to get back to their normal lives.
Another short-term bearish factor for gold has been the recent strength in the dollar. It has also rallied on the prospects of less stimulus and a better than expected recovery. However, over the intermediate-term, there's likely to be bearish pressure on the dollar given the Federal Reserve's dovish stance, and the bipartisan agreement that some sort of stimulus is necessary.
Overall, this dip in gold is a buying opportunity. The Federal Reserve is determined to keep taking more aggressive steps until the inflation rate is meaningfully above 2%. Failure to reach a stimulus deal is a short-term headwind, but it will result in the Fed taking more action in the form of negative rates or a cap on long-term yields.
