Volatility is likely to reign supreme in the gold market as traders wait for the outcome of the US election.
But, the question remains whether gold prices could sustain its recent record highs in the long run.
With opinion polls showing an almost equal divide between Vice President Kamala Harris and former President Donald Trump, the outcome could severely affect the precious metals market.
The possibility of a contested result in Tuesday’s election could add more uncertainty and trigger volatility in the gold market, according to experts.
“In the event of a contested election outcome and a more drawn-out process, there is an upside risk for gold prices versus our forecast, especially in the short term.” Kitco.com quoted Christopher Louney, commodities strategist at RBC Capital Markets.
Moreover, in the lead up to Tuesday’s election results from the US, the gold market has been fairly volatile with prices constantly hitting new record highs.
Series of record highs
Gold prices hit a fresh record high last week when the December futures on COMEX breached the $2,800 per ounce for the first time.
In October, prices had breached the $2,700 per ounce for the first time ever. Before that it had topped the level of $2,600 per ounce as well for the first time.
In the third quarter alone, gold prices on COMEX had risen 15%.
Since the beginning of the year, prices have climbed more than 30% so far.
It is safe to say that spot gold has been experiencing one of its best years in recent memory.
Traders positioning ahead of election results
Experts believe that traders are positioning themselves to counter any uncertainty with the US election outcome.
Last week, after prices climbed sharply to hit $2,800 per ounce, the market experienced a slight pull back.
Ahead of the election on Tuesday, prices on COMEX have dipped below $2,750 per ounce level.
Haresh Menghani, editor at Fxstreet, said:
From a technical perspective, last week’s failure near the top boundary of an ascending channel extending from late July and the subsequent pullback from the all-time peak could be seen as a sign of bullish exhaustion.
Meanwhile, after last week’s decline in prices, gold has stabilised around $2,745 per ounce level.
This price action suggests traders are positioning themselves defensively ahead of potential election-related market turbulence, according to Kitco.com
Other factors
Movements in gold prices come amid not just the possible impact of the US election, but also a host of other factors.
The Federal Reserve is expected to cut interest rates by 25 basis points this week, which adds another level of complexity.
The widely expected decision later this week will follow the Fed’s 50 bps rate cut at its September meeting.
The super-sized rate cut in September had raised expectations of a similar decision this month.
However, hotter-than-expected inflation in the US and a resilient labour market have since them tempered those expectations in the gold market.
Moreover, major central banks around the world, including the Bank of England, Reserve Bank of Australia, Sweden’s Riksbank, and Norway’s Norges Bank, are all set to make rate decisions.
Additionally, heightened geopolitical tensions in the Middle East provides a different layer to the precious metals market.
Rise in gold prices not justified?
Even with all the factors firmly supporting further increase in gold prices, some experts believe that the increased price level is not justified.
Analysts with Commerzbank AG believe that gold prices are expected to remain fairly supported in the lead up to the US elections.
Barbara Lambrecht, commodity analyst at Commerzbank, said in a report:
However, we are sceptical about whether its massive rise of around USD 300 within two months is justified.
“After all, major drivers are missing, as the market’s expectations of interest rate cuts have declined significantly since the beginning of October,” she added.
The “soft factors” in the gold market are currently providing upside pressure to the yellow metal.
However, if these factors subside, there is a risk of a setback for prices, according to Lambrecht.
Demand not so strong
Recent data published by the World Gold Council (WGC) showed that global gold demand rose 5% on a year-on-year basis in the September quarter to a record high for the period.
The data can be misleading as demand was supported by investment flows.
In contrast, jewellery consumption and purchases by global central banks fell sharply during the quarter.
WGC in its report last week did not provide an explanation for the 15% rise in gold prices in July-September.
Commerzbank’s Lambrecht noted:
Rather, they showed that demand for gold was curbed by the rising price level.
This applies in particular to jewellery demand and also to gold purchases by central banks.
Jewellery demand was only strong in India because of a reduction in import tax.
And, consumption tapered off from late September, WGC said.
Excluding the less transparent over-the-counter transactions, demand for gold in the first three quarters was 3% below the previous year’s level, the data showed.
Gold prices, therefore, remain vulnerable to changing market conditions.
“This would be the case, for example, if there were a ceasefire in the Middle East or if Kamala Harris were to become US president, thus avoiding a fundamental change in US policy,” Lambrecht noted.
“In the long term, this alone will hardly be enough to justify the high price level, let alone a further price increase.”
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