Written by: Rania Gule, Senior Market Analyst at XS
Gold prices have experienced notable fluctuations in recent days, with the precious metal trading around $2,690 per ounce on Wednesday.
This level, below its two-week high, reflects a blend of conflicting factors shaping a murky outlook for its near-term future. While geopolitical concerns and trade tensions continue to support gold as a safe-haven asset, the strong U.S. dollar, buoyed by rising Treasury yields, exerts downward pressure on its value.
From my perspective, the recent movements in gold prices are a clear reflection of repositioning by traders ahead of the U.S. Consumer Price Index (CPI) report. This report holds substantial importance in guiding expectations for Federal Reserve monetary policy. Current data suggest that markets are cautiously anticipating this report, as it could significantly impact the U.S. dollar’s trajectory and, consequently, gold’s performance.
The U.S. dollar, which has regained strength in recent days, plays a pivotal role in determining gold’s path. Rising U.S. Treasury yields enhance the appeal of dollar-linked assets compared to non-yielding gold. However, this increase in yields is not without risk, as it could heighten tensions in financial markets, making gold a more attractive option during periods of uncertainty.
On the other hand, I believe that escalating geopolitical risks partially bolster gold’s appeal. Recent developments, such as increased tensions in the Middle East and heightened concerns in Eastern Europe with President Zelensky’s remarks about boosting military funding and foreign troop deployment, underscore gold’s role as a hedge against crises.
Additionally, Donald Trump’s re-election and his aggressive stance on trade policies with major global economies reignite fears of trade wars. These factors collectively emphasize gold’s enduring value as a safe-haven investment in times of geopolitical instability.
From a monetary policy perspective, investor expectations regarding the Federal Reserve remain a key driver of gold prices. Markets currently foresee a strong likelihood of a 25-basis-point rate cut in December. However, recent statements from Federal Reserve officials, including Chair Jerome Powell, hint at a more cautious approach to rate cuts. This hesitancy leaves markets in a state of uncertainty, where upcoming inflation data could significantly shift the narrative.
The upcoming CPI report is expected to provide clearer insights into the direction of monetary policy. Higher-than-anticipated data could strengthen the case for maintaining a hawkish stance, supporting the dollar and pressuring gold. Conversely, signs of slowing inflation might reinforce expectations of rate cuts, potentially driving gold to higher levels.
Despite the negative factors weighing on gold, I believe several reasons make it an attractive investment in the near term. In addition to geopolitical risks, Trump’s strict trade policies could destabilize global markets, boosting demand for gold as a safe-haven asset. Moreover, the anticipated underperformance of major economies such as Canada, the Eurozone, and Switzerland—with their central banks expected to cut rates soon—could further support gold as a preferred investment amid a weak economic backdrop.
In conclusion, the market remains cautiously on edge ahead of the U.S. inflation report. Despite pressures from the strong dollar and rising Treasury yields, gold remains partially shielded by increasing geopolitical and economic risks.
I believe the future trajectory of gold largely hinges on forthcoming economic data and the Federal Reserve’s response to it. Given these dynamics, gold may stay below the $2,700 level in the near term. However, any escalation in global crises or a shift in rate expectations could push it to higher levels.
