• Spot gold prices are higher on Wednesday amid soft US dollar conditions.
• XAU/USD eyes an upside break of a long-term bull flag structure that could take the metal back to all-time highs in 2021.

Spot gold (XAU/USD) is grinding back towards the $1890 level, up just over $10 or around 0.6% on the day. USD weakness has been the driving force behind the broad gains being seen across precious metals markets on Wednesday; the Dollar Index fell below its previous annual lows around 89.70 to set new lows in the 89.50s (although has recovered back towards 89.70 in recent trade). Remember that spot precious metal prices (which are of course priced in US dollars) have a negative relationship to the US dollar.

USD LIMPS INTO THE NEW YEAR: WHAT THIS MEANS FOR PRECIOUS METALS…

Most institutions are calling for a weaker dollar in 2021 as global growth (by the second half of the year, anyway) starts to see significant improvement as major economies approach herd immunity against Covid-19. Though USD short positioning, according to the most recent CFTC report, is close its highest levels in 2020, traders still seem keen to front-run some of this US dollar weakness going into the new year.

US fiscal and political developments appear not to be doing the US dollar much favours either; it is looking increasingly likely that 1) Congress is soon going to approve a juiced-up $2000 stimulus cheque to each American (vs $600 before) and 2) the Democrats might win both of the Senate seats up for grabs in the Georgia run-off election (which would hand the Democrats control over Congress and trillions more would be spent and borrowed by the US government in 2021).

Pretty much, it looks like more stimulus is increasingly likely which is being seen as a US dollar negative given 1) the stimulus will boost US and global growth which is good for risk assets and bad for safe-haven USD and 2) the stimulus is likely to encourage further Fed money printing to keep real interest rates from rising. What’s bad for USD is generally good for precious metals, as noted above. Moreover, all of this monetary and fiscal stimulus being pumped into the economy by the government and Fed duo is likely to further boost inflation expectations, which are already close to two-year highs (a positive for precious metals, which are seen as a hedge against inflation).

XAU/USD eyes upside break of bull flag

Looking at XAU/USD over a longer time frame, the asset appears to have formed a bullish flag in 2020; the rally to early August highs in the $2070s from start of year levels just above $1500 is the pole, and the price action of the last five months, that saw the precious metal slip back to lows under $1800 only to more recently recover back towards $1900 is the bullish flag. A break to the north of this flag (likely signalled by a convincing break above $1900) would open the door to a retest of November highs above $1960 and then ultimately back towards annual highs in the $2070s.

XAU/USD daily chart