Gold Rebounds! Temporary Relief or Sustained Recovery?

Gold has staged a recovery recently, but the factors that contributed to its drop from record highs may reassert their influence.​

Time for a Rebound

Last week, gold witnessed its worst performance in three years. It declined by over 4% over the course of six days. However, precious metals, including silver and platinum, faced a general downturn too. According to reports, the main driver was the expectation that the Federal Reserve would be less aggressive in cutting interest rates. However, the futures market remained largely stable over the past week. On the other hand, Treasury yields continued to rise following upbeat retail sales and Empire manufacturing data, suggesting that American consumers remain resilient and business optimism is rebounding.

On Monday, gold reversed course and began to rise. It reached weekly highs by Tuesday due to geopolitical concerns following US President Joe Biden’s announcement that Ukraine could use American-supplied long-range missiles to strike deep into Russian territory. Russian President Vladimir Putin declared a change in the nation's nuclear doctrine, which included the use of atomic weapons in retaliation for conventional strikes. Gold rose along with other safe-haven assets, such as Treasuries, as markets worried that the conflagration in Ukraine could escalate in the final days of the Biden Administration. If tensions ease in the coming days as Democrats call for Biden's removal, gold could come back under the sway of fundamentals, with analysts still somewhat bullish in the medium term.​

Cut and Recovery

Investors will monitor the release of S&P Global Flash PMI figures for the US later this week. The manufacturing sector is expected to continue contracting due to election uncertainty, but this may be offset by strong expansion in the services sector. Manufacturing PMI is projected to rise to 49.2 from 48.5, while services PMI is expected to remain unchanged at 55.1 compared to 55.0 previously. The survey covers a period after the election, so investors will be keen to understand how expected policies, such as tariffs, might impact businesses. Pre-ordering and shipping goods to front-run tariffs could manifest as signs of congestion in the PMI data.

A resilient US economy would likely prompt the Fed to maintain interest rates high. However, markets count on a FOMC rate cut with a 50% chance at its final meeting of the year. Cutting interest rates might offer further support for gold prices in the short term. A faster economy, particularly one affected by higher tariff costs, however, would likely lead to increased inflation, making gold more attractive as a store of value. With this in mind, some analysts suggest gold could return to the $2,700 per ounce level, with Goldman Sachs recommending buying the precious metal towards its $3,000 per ounce target by the end of 2025.​

Impulse Weighs on Gold

The drop in gold prices seems impulsive, suggesting a potential correction towards $2,700 and a subsequent continuation, possibly testing the ascending channel around $2,400. A breach below that level could pave the way for a decline to $2,350 and $2,100. Conversely, an upward continuation could open the door past $2,700 and new record highs beyond $2,800. However, the overall direction remains uncertain, with a range-bound scenario potentially forming a flag, pennant, or triangle pattern.​

Source: SpreadEX / Gold, Dec

Key Takeaways

Gold prices have recently rebounded after a substantial drop, but the underlying factors that contributed to the previous drop may reassert their influence soon. While geopolitical tensions have temporarily boosted safe-havens, the resilience of the US economy and the potential for interest rates to remain high could weigh on gold prices in the medium term. Analysts suggest that gold could return to the $2,700 per ounce level, with Goldman Sachs projecting it could reach $3,000 by the end of 2025.