The value of gold, a traditional safe haven asset, often surges during times of conflict and economic uncertainty. However, the recent landscape appears to be shifting as US stocks have defied the norm by rallying instead of declining. This unusual dynamic can be attributed to several factors, including comments from Federal Reserve officials about the term premium in the bond market and a weaker US dollar, which have created a more dovish atmosphere for equity market participants seeking to recover from recent losses.
Investors have been flocking to US Treasuries, driving down yields and increasing selling pressure on the US dollar. A weakened dollar is typically favorable for gold prices, as it offers a discount for non-US buyers.
Gold is highly responsive to both monetary policy developments and geopolitical conflicts. The current scenario is complex, with various factors influencing the market’s behavior. To gain insight into what the fourth quarter holds for this precious metal, read our Q4 forecast below:
The recent gold chart indicates that the market was due for a reprieve from the aggressive selloff. This selloff gained momentum after the Federal Reserve confirmed its commitment to achieving a 2% inflation target by eliminating 50 basis points worth of rate cuts in 2024. The Fed’s summary of economic projections also acknowledged better-than-expected growth in the US, which could add to inflationary pressures and maintain a restrictive monetary policy.
At present, $1875 is the most immediate resistance level, and it holds significance on a long-term basis (as seen in the weekly chart). Despite this, gold is taking a temporary breather, preparing for its next move. While a weaker dollar and lower treasury yields could contribute to a bullish trend, the primary driver remains the extent of the conflict in the Middle East. With Israel’s commitment to escalating efforts in response to attacks from Hamas, prospects of peace returning to the region seem slim, potentially opening the door to further gains in the gold market. Significant support can be found at the psychological level of $1800.
In the midst of conflict, gold volatility has risen, marking the largest move since the regional banking turmoil earlier this year. This increase in volatility is not exclusive to gold but is also observed in stock market volatility (VIX) and bond market volatility (MOVE).
A closer look at the weekly gold chart reveals that gold prices had hinted at a bullish breakout when they traded and closed above the descending channel. However, the recent decline in gold’s value is attributed to fears that the Federal Reserve will maintain its ‘higher for longer’ stance. The chart underscores the importance of the $1875 level as a critical decision point for the precious metal, given its historical significance in halting previous price surges.