Gold dips on decreasing safe-haven demand

Gold prices dropped below the key $2,600 level on Tuesday as the US dollar and treasury yields continued to gain strength. If gold prices rise, they may encounter resistance at $2,790 per ounce, while if gold prices decline, support may be encountered near $2,547 per ounce. 

Uncertainty over the US presidential elections propelled gold prices to an all-time high of 2,700 per ounce earlier this month. Gold prices had been moving in overbought territory, however, and collapsed after the announcement of Donald Trump’s victory in the US Presidential elections last week. Markets are still digesting the implications of Trump’s victory, putting pressure on gold prices. Trump’s proposed tariffs and tax policies are expected to support economic growth, boosting the dollar and putting pressure on gold prices.

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 continued to rise on Tuesday ahead of Wednesday’s US inflation report, and the index surged from 105.5 to 105.9. US treasury yields also advanced, boosting the dollar, with the US 10-year bond yield rising from 4.31% to 4.42%.

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. In addition, reports that Trump has urged Russian President Vladimir Putin to deescalate tensions in Ukraine put pressure on gold prices this week.

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 had already 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. The Fed’s statement after the meeting was slightly dovish, expressing confidence that US inflation would gradually drop to the central bank’s 2% target. Fed Chair Jerome Powell stated that the progress of disinflation is steady, and the labor market is strong, allowing for a shift towards a more neutral monetary policy. Odds of another rate cut in December are currently approximately 65%.

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Written by:
Myrsini Giannouli

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