Gold rises as safe-haven demand outweighs the dollar’s rally

Gold prices dipped to $2,620 per ounce in early trading on Wednesday, but rallied later in the day, rising to $2,650 per ounce. If gold prices rise, they may encounter resistance at $2,700 per ounce, while if gold prices decline, support may be encountered near $2,540 per ounce. 

Gold prices skyrocketed to an all-time high of $2,700 per ounce earlier this month, but had been moving in overbought territory, and collapsed after the announcement of Donald Trump’s victory in the US Presidential elections. 

The implications of the Republicans’ victory are putting pressure on gold prices, which have registered a steep decline so far in November. Trump’s proposed tariffs and tax policies are expected to support economic growth, boosting the dollar and putting pressure on gold prices. The effects of Trump’s victory on markets are starting to fade this week, however, and gold prices are starting to rally. 

Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar surged on Wednesday and the dollar index rose from 106.2 to 106.6. US treasury yields also strengthened, with the US 10-year bond yield rising from 4.39% to 4.41%. Gold prices extended gains on Wednesday, however, as increased safe-haven demand outweighed the dollar’s rally.

Geopolitical tensions raise the appeal of safe-haven assets propping up gold prices. The crisis in the Middle East had been boosting demand for safe-haven assets, keeping gold prices high. The conflict in the Middle East, however, has been raging for over a year and markets are starting to ignore this risk, lowering the appeal of safe-haven assets. 

Reports that Trump has urged Russian President Vladimir Putin to deescalate tensions in Ukraine put pressure on gold prices last week. Gold prices rallied this week, however, as tensions between Russia and Ukraine flared over the weekend. Safe-haven demand rose after US President Joe Biden green-lighted Ukraine’s use of US-bought missiles against Russia. Russia has deployed North Korean troops into Ukraine, which fuelled Biden’s decision to permit Ukraine to use the missiles. These long-range missiles can reach deep into Russian territory and Biden’s decision can cause the crisis in Ukraine to escalate further. Ukraine has already launched the first missiles into Russia, according to reports by Bloomberg. 

Reports that Russian President Vladimir Putin updated Russia's nuclear doctrine boosted safe-haven demand on Tuesday, boosting gold prices. Dmitry Peskov, Press Secretary of the President of the Russian Federation, said on Tuesday that Russia might use nuclear weapons if it was subject to a conventional missile assault supported by a nuclear power. The Russian Government’s message came as a response to Biden’s approval of the use of US missiles by Ukraine against Russia. Peskov also threatened that Biden’s approval of the use of missiles by Ukraine could lead to a third world war. On Wednesday, however, Russian President Vladimir Putin stated that he would be open to negotiations for a ceasefire deal with Ukraine, brokered by US President-elect Donald Trump, according to a report by Reuters.

The US Federal Reserve cut interest rates by 25 basis points last week to a target range of 4.50% to 4.75%. The Fed launched its easing cycle in September, with an aggressive 50-bp rate cut, signaling the end of its restrictive monetary policy. Gold prices are supported by expectations of further Fed rate cuts. Odds of another rate cut in December dropped to 50% on Wednesday on hawkish Fedspeak. 

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Written by:
Myrsini Giannouli

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