- Gold markets managed to partially pare their losses and reverse a deep sell-off over the past two days following Friday's surprise attack by Hamas on Israel, overcoming negative sentiment sparked by the Federal Reserve's hawkish outlook on higher US interest rates for a longer period as well as monetary policy.
- According to trading, the price of gold (XAU/USD) rose towards the resistance level of $1877, its highest level in two weeks.
- Gold has thus reversed a decline of approximately 7% since late September with the yellow metal trading above $1,930 per ounce on September 20.
Overall, gold not only plays an important role in portfolio diversification but can also be an effective hedge against uncertainty. Gold has traded near all-time highs for most of last year, with demand for the commodity as a geopolitical hedge rising due to the Russian war in Ukraine as well as demand for an inflation hedge. However high interest rates and the rise in the value of the US dollar effectively eliminated gold's rise this year.
Fortunately, Ole Hansen, a commodities analyst at Saxo Bank, predicted that tensions in the Middle East may mean that the Fed “will not continue to raise interest rates amid heightened uncertainty, and the possibility of peaking interest rates has suddenly approached despite The potential inflationary impact of the Coronavirus.”
However, a full-force XAU/USD rally is far from guaranteed thanks to a slew of headwinds. Gold prices fell slightly in Tuesday's session even as Israel launched an angry retaliatory attack on Hamas, and gold remains in oversold territory, indicating that the bears are not about to give up.
Accordingly, commodity analysts reported that tactical investors have significantly reduced their exposure to gold, and reduced their positions in platinum, but increased their exposure to silver and palladium. According to analysts, macro headwinds remain for gold, having built up after the hawkish Fed meeting in September. They pointed out that gold prices initially held up well, supported by the physical market that maintained the minimum price. But the decline in stock markets, rising nominal and real yields, as well as expectations that interest rates will remain higher for a longer period, all weighed on gold, leading to a breach of key support levels. Gold is now trading at its lowest levels reached in March 2023.
The last time two-year yields were trading at similar levels, suggesting that gold prices may not have much downside potential either. Forex market analysts at Standard Chartered Bank expect the US dollar to hold on to its recent strength for a bit longer. They noted that US economic activity was stronger than expected and that the US dollar largely tracks spreads, saying the dollar may not weaken meaningfully until mid-2024.
On the upside of things, Standard Chartered noted that while other asset markets are indicating risk-off sentiment, particularly in light of the rise in the US dollar, gold has not benefited from the same sentiment. They argued that gold markets do not place a significant premium on the risk of a US government shutdown, especially after the ouster of Kevin McCarthy as Speaker of the House of Representatives, which increased the risk of a US government shutdown within months.
On the other hand, concerns remain about the pace of China's economic recovery, recession risks remain, as well as fears that inflation may rise again. Standard Chartered Bank adds that these macro factors are usually supportive of the movement of gold prices. However, high-interest rates and a strong US dollar dominated, weighing on the recent price action. In fact, gold prices were expected to trade at much lower levels than current levels, but physical market strength, especially in the formal sector, has limited the risks of falling prices.
Gold Technical Outlook
I often advised against buying gold from every falling level, as with the rise of the US dollar, which harms gold, there are strength factors for the yellow metal, represented by global geopolitical tensions and fears of economic recession. The current upward performance is awaiting today's announcement of US inflation numbers, in addition to the reaction to the developments in the Middle East region, which recently shook global markets.
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