Gold prices have experienced a sharp decline, falling to a two-month low just three weeks after reaching a record high. Spot gold recently dropped to just above $2,600 an ounce, marking a 7% decline from its peak on October 30, when it traded at $2,801 per ounce. This drop represents the largest dollar and percentage decrease since June 17, 2021, according to Dow Jones Market Data.
The fall in gold prices is partly attributed to the strengthening of the US dollar, with the precious metal often moving inversely to the greenback due to its dollar-denominated nature. As the US dollar rises, gold becomes more expensive for non-US investors, including those in Australia, where the Australian dollar now buys less of the commodity. However, this inverse relationship between gold and the US dollar is not always guaranteed.
The shift in market dynamics comes amid expectations that President-elect’s administration will implement inflationary policies, including corporate and worker tax cuts, along with tariffs on imports to the US. These measures are expected to boost the US dollar, which has recently risen to a six-month high against major currencies.
Analysts have dubbed this surge the “Trump trade,” noting that the President-elect’s proposed big-spending policies have driven the US dollar’s rise. These measures, including higher tariffs, are seen as reducing the Federal Reserve’s ability to cut interest rates further.
Vivek Dhar, Commonwealth Bank’s director of mining and energy commodities research, explained that the decrease in gold prices is partly due to a reduced demand for the metal as a safe haven, with the uncertainty surrounding the US election now behind markets. Dhar pointed out that the post-election slump in gold futures, especially following Trump’s victory on November 5, can be attributed to the strengthening US dollar, which reflects market expectations of the President-elect’s inflationary policies.
The Federal Reserve’s potential actions also play a role in shaping the outlook for gold. According to FedWatch, there is still a 58.7% chance that the Federal Reserve will cut interest rates in December. However, over the longer term, markets expect fewer rate cuts from the central bank in 2024.
Jessica Amir, a market analyst at Moomoo, noted that in the past, gold has rallied significantly following interest rate cuts, with an average increase of 100% from the beginning of a rate-cut cycle to gold’s subsequent record highs. However, Dhar cautioned that if the US dollar weakens less than expected, it could put downward pressure on gold prices by the end of the year.
“Our forecast for gold futures to average $2,800 per ounce in Q4 2024 is now under threat,” Dhar said. “Our bullish outlook for gold futures this quarter was based on the metal’s ability to find support in any environment, especially when the US dollar weakens.”
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