Gold Retreats After Record High

Gold (XAU) hit a record high of  $2,740 per ounce on Monday, 21 October, on rising tensions around ongoing retaliatory moves in the Middle East. 

However, the yellow metal ended the session lower as US Treasury yields rose after Minneapolis Fed President, Neel Kashkari, advocated for a higher neutral interest rate level and Dallas Fed President, Lorie Logan, favoured a more gradual pace of cuts. 

The dollar index (DX) was also supported by rising chances that Trump would win the US presidential elections, as his past policies are known as inflationary. In fact, higher oil (CL) prices supported the inflationary narrative, adding to the greenback’s gains.

Meanwhile, precious metal silver (XAG) rose to its highest level since late 2012, with analysts noting that silver could pick up pace and catch up with gold going forward. Analyst Giovanni Staunovo of UBS (UBSG.VX) still expects gold prices to reach $2,900 per ounce next year due to the Federal Reserve’s interest rate path. 

Pushing the Brakes at Records 

The rise in US Treasury yields can be blamed for gold’s withdrawal from record highs by market close on Monday. But it was a combination of factors that contributed to the decline of gold after it reached record highs.

Firstly, geopolitical tensions in the Middle East increased over the weekend due to a drone strike near the villa of Israeli Prime Minister Benjamin Netanyahu.  However, reports circulated that the residence of Netanyahu was vacant and no one was hurt, shifting risk perspectives. (Source: Newsquawk)

In the meantime, nonetheless, the risk event bolstered oil prices, revamping the inflation narrative which often indicates a rise in interest rates. As such, European government bonds (EGBs) were sold off, which later spilt over into the US markets, contributing to the rise in US yields.

Coupled with Fed speakers Kashkari and Logan signalling a hawkish view on how the Fed should cut rates, the "Trump Trade" might have influenced market inflation expectations, which weighed further on US bonds. The Trump Trade is known for a shift in market behaviour stemming from former President Trump’s policies and how they might impact certain industries and, in extension, certain stocks.

The chances of an interest rate reduction in December fell from 24  to 22 basis points (bps) between sessions after Monday’s speeches. Although the probabilities stood at a 90% chance a month ago, gold still rose higher despite more easing, typically supporting higher gold prices as central banks globally are still reducing their interest rates. Last week, the European Central Bank (ECB) cut its rate for the third time in 2024, and the People's Bank of China (PBOC) cut its loan rates more than expected on Monday, both signalling further demand for the yellow metal. (Source: Euronews)

Global Demand Intact

Gold prices have increased over 30% year-to-date (YTD) as central banks loaded their reserves up in early 2024. Still, China, the largest buyer of gold, slowed down its purchases in May. But with a Trump win becoming more likely in the US elections, the country may seek to diversify its assets even further away from the dollar. (Source: ABCNews)

In fact, China’s demand for USD and RMB gold rose by 5% and 3.7% in September on the back of an anticipated sales boost ahead of the October National Day Holiday. Chinese gold Exchange Traded Funds (ETFs) inflows led other countries with about $2.3 billion year-to-date as peak season in Q4 arrives.

Aside from China, global central bank demand eased in August, though net purchases rose by eight tones. Gains were led by the central banks of Poland, Turkey and India. Notably, in 2024, Turkey purchased the most gold at 52 tonnes, which is about 35% of its total reserves in less than a year alone. India and Poland come second and third with 45 and 39 tonnes YTD. More interestingly, net sales have not increased, pointing to a wait-and-see approach or a catalyst.

Waiting for Clarity

Evidently, geopolitical tensions, fiscal instability, uncertainties surrounding the US presidential election, and central bank actions are some of the catalysts investors and even central banks may be waiting for clarity before ramping up gold purchases. 

However, with less uncertainty around how major economies will proceed with easing, sustained demand for gold might lie on the scale and impact of economic policy measures, fiscal policy, and international relations as we head toward 5 November, particularly from major economies the actions of which add more uncertainty in the current economic landscape.

After China disappointed markets earlier in September, it recently announced stimulus and fiscal support to boost its economy. Regardless, investors have yet to fully digest the positive impact of China’s measures, waiting for further clarity. 

A reduced mortgage rate could boost the housing market in China and, in turn, improve investor confidence, especially following the latest upbeat Gross Domestic Product (GDP) figures in China. In fact, Goldman Sachs (GS) has raised its estimate for the country’s GDP growth rate for the year from 4.7% to 4.9% in 2024, which aligns with China's own target of around 5%, and from 4.3% to 4.7% in 2025. 

Despite traders in China being more convinced by the PBOC’s actions than global traders, risks of tariffs on Chinese goods are possibly one of the catalysts global markets expect clarity on following the outcome of the US election. Yet, the PBOC could tally up its counter-cyclical factor even in a Trump win scenario and stabilise its local market, offering a security blanket. 

At the end of the day, Trump’s trade war with China during the 2018-19 period resulted in more upside for gold overall.

Conclusion

The recent volatility in gold prices reveals the complex interplay of geopolitics, monetary policy, and market expectations. On the one hand, central banks are adjusting their policies lower in gold’s favour. On the other hand, rising chances of a Trump win along with higher oil prices due to geopolitical conflicts further influence gold prices. 

As central banks continue to stockpile gold, albeit at a slower pace, the demand dynamics within major economies like China will also play a crucial role. The country might have appeared to provide more uncertainty in September and early October; however,  growing investor confidence in recent stimulus measures may be the catalyst for global markets looking for clarity on how to navigate gold ahead and after the US presidential election.