The renewed hope that the fiscal stimulus will be approved by Congress before the presidential election pushed the XAU/USD quotes to a weekly high, but the bulls are attacking with an eye on their own rear – if additional assistance to the US economy is not provided in the near future, gold risks falling into a wave of sales. In addition, the new stimulus package requires resources, and an increase in bond issuance is a direct road to higher yields, which is bad news for the precious metal.
After House Speaker Nancy Pelosi announced a rapprochement with Treasury Secretary Steven Mnuchin and that a deal could be concluded by the end of the week by October 25, hope returned to the market. Few people believed that the fiscal stimulus would be provided before November 3. Moreover, there was no guarantee that the issue would be resolved quickly after the election. Only a "blue wave" could mean that the case would end in a happy ending. Otherwise, the Republicans would continue to put a spoke in the wheel, which they are doing now. According to Senate Majority leader Mitch McConnell, a package of $2 trillion or more is unacceptable.
The additional support factor is extremely important for gold. The greater its scale, the sooner inflation will increase. In the US, consumer prices are already rising faster than in the Eurozone, due to previous stimulus packages and the willingness of Americans to spend rather than save money. The precious metal is traditionally perceived as a hedging tool against inflation, so the CPI acceleration is a bullish driver for XAU/USD.
Inflation dynamics in the USA and the Eurozone:
In the short term, new money from Congress can reduce the real yield of Treasury bonds and raise the price of gold. Whether it can update historical highs will depend on the US debt market and the Federal Reserve. In theory, an increase in bond issuance leads to secondary market sales and higher rates, so real yields may increase, which will limit the potential for an XAU/USD rally. At the same time, it is extremely important for the Fed that rates remain low because otherwise, the economic recovery process will not go as fast as we would like. Due to QE, the Central Bank can bring down yields and thus help gold.
Gold dynamics and US Treasury bond yields:
In my opinion, the precious metal is ready to continue the rally if the epic with fiscal stimulus is completed before the election. If not, we will face a new period of uncertainty, including a possible victory of Donald Trump, which will increase demand for the US dollar and put pressure on gold.
Technically, the bulls are trying to return the precious metal to the limits of the previous consolidation range of $1930 - $1990 per ounce – the "shelves" of the "Splash and shelf" pattern. If they manage to move the quotes to the middle of it, a "Deception-blowout" model will appear, which increases the risks of continuing the rally. In this regard, you should buy gold if the day closes above $1930 and $1960, and sell it if you fail to storm the resistance at $1930 per ounce.
Gold, daily chart:
