War Drives Gold Higher, But Why Does WTI Fluctuate?

Gold prices rose over 10% from its early October low, with analysts pointing towards the war in Gaza. But WTI oil hasn't been as strong as the commodity in the midst of mounting US debt despite rising geopolitical tensions. Is there anything else to suggest the gold trend could continue?

Uncertainty Gives Rise to Golden Opportunity

Naturally, gold as a safe haven outperforms during periods of heightened geopolitical uncertainty, and with two wars raging at the moment with a threat of escalation, gold prices have been upbeat. But gold can trend lower when Treasury yields rise. Recently, US yields hit several multi-year highs. With gold providing no dividend, the interest rate offered by debt tends to be more attractive. So, why have these two opposite forces moved to push gold higher?

In one word: China. Despite the economic difficulties the Asian giant has faced recently, it remains the top buyer of gold. China has been selling off its holdings in US treasures - it's not the only one - while the PBOC builds up its gold reserves. The shake-up of the housing industry in China is also a bullish sign for gold: Traditionally, Chinese citizens are big savers. The housing industry was driven by a demand for investment in real estate, as that was seen as a secure store of value. So, the recent collapse of the sector is likely propelling people in China to look for a more traditional safe haven: Gold.

The Future Swings that Could Drive Gold

With the Fed pledging to keep rates high for the entirety of next year and raise them again before this year is out, treasury yields will likely remain high. Traditionally, that would be a poor sign for gold, but the yellow metal has managed to defy that trend amidst China's demand while interest rates were going up. If they are to remain steady now, this could relieve some of the pressure on gold.

The recent blow-out GDP figures for the US have left politicians celebrating, but Wall Street is not so sure the country has managed to escape a full-blown recession just yet. Typically, the yield curve de-inverts right before a recession happens, and with the curve still inverted, some analysts suggest that the Q3 results are the high water mark before the downturn. That would inevitably lead the Fed to cut rates, which could help give gold a substantial boost. Even if the US manages to avoid a recession, the economy's buoyancy would likely leave consumers with extra money to spend on things like jewellery - the bulk of the gold bought. Add to that the unknown of how long geopolitical tensions will last, and the positives for gold are lining up. Of course, an unexpected event could significantly derail the upside for gold, such as the rising of Treasury yield or a more pronounced downturn in the Chinese economy.

Gold's Flag Pattern Points to New Records

The price of gold seems to suggest that the swing low of $1820 an ounce from early October completed a cruising flag pattern, pending further stubs higher so long it keeps firm above the upper descending trendline. If the measured-move projection were to play out, the yellow metal could extend to a record high near $2210/oz, with the peak of $2085 seen as interim resistance. Conversely, losing the $1945 support could open the door to $1880, exposing the October low and increasing speculation for additional pain towards $1740.

Source: SpreadEx / GOLD

Key Takeaways

Gold prices have surged over 10% from their October low, driven by the war in Gaza and mounting US debt. The uncertainty caused by geopolitical tensions has made gold a safe haven, especially with China selling off US Treasuries and increasing its gold reserves. The recent collapse of the housing industry in China has also led people to seek the security of gold. While high treasury yields traditionally affect gold negatively, if they remain steady or if the US enters a recession and the Fed cuts rates, gold could receive a significant boost. However, unexpected events like rising Treasury yields or a downturn in the Chinese economy could hinder gold's upward trend.