Gold prices saw a sharp decline of 2.97%, closing at ₹75,311, as investor sentiment shifted towards riskier assets following key developments in U.S. politics and geopolitical tensions. The market reacted to U.S. President-elect Donald Trump’s nomination of Scott Bessent to lead the U.S. Treasury, and rising optimism surrounding tax cuts and dollar stability. A potential ceasefire between Israel and Hezbollah further dampened gold’s appeal, as confidence in risk assets surged.
Scott Bessent’s Nomination Drives Market Optimism
The appointment of Scott Bessent, a well-known financier with a focus on market-friendly policies, to head the U.S. Treasury ignited a wave of optimism in financial markets. Bessent’s expected policy direction, which emphasizes tax cuts and the maintenance of the U.S. dollar’s status as the world’s primary reserve currency, contributed to a stronger market outlook.
Investors took this as a signal for an economic environment that favors growth, further boosting confidence in risk assets such as stocks and bonds. As a result, the demand for safe-haven assets like gold waned, leading to a sell-off in the precious metal.
Geopolitical Developments Weigh on Gold
In addition to the domestic U.S. political news, international developments also contributed to gold’s decline. Reports indicating a potential ceasefire between Israel and Hezbollah added to the growing optimism surrounding global stability. The ceasefire would ease tensions in the Middle East, further reducing the need for gold as a safe-haven investment.
As investors flocked toward riskier assets, including equities and government bonds, gold prices, which are often seen as a hedge against geopolitical risks and market volatility, struggled to maintain their footing.
Market Expectations for U.S. Fed’s Policy and Interest Rates
On the macroeconomic front, the focus has shifted toward the upcoming minutes from the U.S. Federal Reserve’s November meeting and key inflation data. Investors are eager for insights into the Fed’s future interest rate policy, with particular attention on the Personal Consumption Expenditures (PCE) inflation data, which is the Fed’s preferred gauge of inflation.
The market’s expectations for a December rate cut have diminished over the past week. The probability of a 25 basis points (bps) rate cut in December has decreased to 56% from 62% just a week ago. This shift suggests that the Fed may take a more cautious approach to rate cuts, which has further supported risk assets and undermined gold’s appeal.
Weaker Demand for Gold in India and China
Gold’s appeal as a safe-haven asset was also affected by weaker demand in major consumer markets. In India, rising gold prices deterred buyers, especially in the jewellery sector, with premiums falling sharply. Premiums in India have dropped to $3 per ounce, down from $16 per ounce the previous week, signaling a slowdown in local demand.
Similarly, in China, premiums varied, with reports showing prices ranging from a $10 premium to a discount of $6 per ounce. These fluctuations reflect the challenges gold is facing in its key demand centers, where economic conditions, currency fluctuations, and rising gold prices have led to reduced buying interest.
World Gold Council Reports Steady Year-on-Year Demand
Despite weaker demand in some regions, global demand for gold remained relatively stable. The World Gold Council (WGC) reported that global gold demand in Q3 2024 was steady year-on-year at 1,176.5 metric tons. Robust investment activity helped offset weaker consumption in the jewellery sector and slower central bank purchases.
One of the more positive developments for the gold market was the performance of physically-backed gold exchange-traded funds (ETFs). The WGC reported inflows of 95 tons into gold ETFs, marking the first positive quarter since Q1 2022. This suggests that investors are continuing to see gold as a valuable hedge, despite the recent drop in prices.
Long Liquidation and Falling Open Interest
In response to the price decline, the market witnessed significant long liquidation. Open interest in gold contracts dropped by 24.71%, settling at 4,814 contracts. This indicates that investors are pulling back from gold futures positions as the market sentiment shifts toward riskier assets.
The reduction in open interest and the ongoing liquidation of long positions suggest a cautious outlook for gold in the near term, as traders adjust their portfolios in response to the broader market conditions.
Technical Levels for Gold Prices
From a technical perspective, gold’s price movement is now being watched closely by traders and analysts. The immediate support for gold is seen at ₹74,650, with further downside potential toward ₹73,995. These levels represent key points where buying interest may emerge, offering potential support to gold prices.
On the upside, resistance is pegged at ₹76,480, and a sustained move above this level could see gold prices push toward ₹77,655. This would mark a recovery from the recent slump and could attract further buying interest if market sentiment shifts once again toward risk-off assets.
Looking Ahead: Gold’s Outlook Amid Changing Market Sentiment
As we look ahead, the outlook for gold remains uncertain amid shifting investor sentiment and macroeconomic factors. The gold market is caught between competing forces: the optimism surrounding the U.S. economic outlook, fueled by Scott Bessent’s Treasury nomination and potential tax cuts, and concerns about inflation, interest rates, and geopolitical risks.
The market’s reaction to the upcoming U.S. Fed minutes and the PCE inflation data will be pivotal in determining the direction of gold prices. If the Fed signals that rate cuts are slowing, the U.S. dollar may continue to strengthen, further dampening gold’s appeal. On the other hand, if inflation concerns intensify, gold may see renewed interest as a hedge.
Investors will also continue to monitor demand dynamics in key markets such as India and China, as well as developments in global geopolitics. A sustained increase in gold ETF inflows and strong central bank buying could support prices in the medium term.
Conclusion: A Challenging Environment for Gold
Gold’s recent price drop highlights the challenges facing the precious metal amid a more optimistic economic outlook and a shift toward riskier assets. With U.S. Treasury yields rising, a stronger dollar, and falling demand from major consumers, gold has struggled to maintain its safe-haven status. However, the recent positive inflows into gold-backed ETFs and stable global demand indicate that there are still opportunities for the metal to recover if market conditions change.
For now, gold faces a delicate balance between its role as a hedge against economic and geopolitical risks and the broader market’s shifting preferences. Investors will need to keep a close eye on key economic data, geopolitical developments, and central bank actions to assess the future direction of the precious metal. The road ahead for gold is likely to be volatile, with opportunities for both short-term gains and long-term caution.
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