What's in Store for Gold?

Gold prices have hit something of a plateau since the October rally. Will it return to the earlier downtrend, or will something give it a push above $2,000/oz?

The Magic Number

This year, gold has been in high demand despite rising interest rates and treasury yields, which generally sap investor appetite for the yellow metal. But that seems to have faltered a bit last quarter, with overall physical sales dropping 6% from the high recorded last year. Of course, last year was when Europe was facing a potential recession due to gas restrictions over the war in Ukraine. It shouldn't be surprising that the drop in demand for gold came mainly from Europe since the continent has gone through another year of anaemic growth, but at least the worry over energy supplies has abated.

Rising geopolitical issues have helped propel gold recently, once in the aftermath of the Russian invasion of Ukraine and now the war in Gaza. But, it's not just safe-haven demand; central banks last quarter bought the second highest amount of gold on record, led by the PBOC. A relatively small number of central banks have driven demand above expectations, supporting the price. Those purchases are often opportunistic and seem to fall off when gold prices threaten to break through $2,000/oz.

Time to Break the Barrier?

Last week, the Fed decided to pause its rate hiking cycle once more, leaving the impression that rates will stay steady at this level for quite some time. If gold prices tend to fall while yields rise, the reverse is also true. Gold managed to stay relatively flat during the hiking period, suggesting there were demand factors that outweighed the normal downward pressure. Those factors include the high-risk geopolitical environment, which has only intensified recently. With no more downward pressure from increasing rates, the price of gold might be unrestrained to drift higher.

That assumes the Fed manages to keep rates around the current level and isn't forced to cut due to a surprise economic downturn. The weak NFP reported on Friday was followed by a jump higher in gold prices, as it suggested that the US economy might be cooling, which could lower yields. That trend might put further upward pressure on gold if the US doesn't manage to stick the vaunted "soft" landing, and the Fed is forced to cut rates. With the two wars at the moment seeming not to have a near-term end and the possibility that further geopolitical tensions arise, the situation appears to be stacked in favour of gold.

Double-Bottom in Focus

Gold prices are currently on standby mode as the metal fell to form a double-bottom at $1965 an ounce. If the descent continues, this may turn out to be a slopier flag pattern pending further upside towards the peak of $2020 and the record high of $2070. The potential breakdown could see a drop to $ 1945 and $1920, with anything under $1900  increasing the risk of a reversal.

Source: SpreadEx / GOLD

Key Takeaways

Gold prices have stagnated after a rally in October, and it is uncertain whether they will return to a downtrend or receive a push above $2,000 an ounce. Despite rising interest rates and treasury yields, it has been in high demand this year, but physical sales dropped 6% in the last quarter, mainly from Europe. Geopolitical issues have contributed to the recent rise as central banks, led by the PBOC, have bought significantly. With the Fed pausing its rate hiking cycle, there is potential for gold prices to drift higher due to factors like the high-risk geopolitical environment. However, if the US economy shows signs of cooling and the Fed is forced to cut rates, gold could face upward pressure.