Rania Gule

Gold prices dropped sharply on Tuesday, starting Wednesday’s trading at $2,617 after a strong U.S. jobs report boosted expectations that the Federal Reserve may slow down its rate cuts. This negatively impacted gold, which offered no yield. Additionally, news reports suggesting support from parties in the Middle East conflict for efforts to achieve a ceasefire prompted investors to take profits. The prospects of easing tensions shifted capital from safe-haven assets like gold to higher-risk assets such as stocks.

At the same time, gold is facing additional pressure from rising U.S. Treasury yields, which remained above 4% following the strong non-farm payroll report. I expect that any reduction in geopolitical tensions will lead to continued selling of gold, especially if U.S. stocks keep gaining amid improved market sentiment. As investors await U.S. inflation data and the Federal Reserve’s meeting minutes, any further hints about policy stability could push gold prices even lower, particularly if the Fed takes a more cautious approach to rate cuts.

The yellow metal has declined for six consecutive days and remains below the key support level of $2,630. In my view, gold is influenced by several fundamental factors, including the strength of the U.S. dollar, investor expectations of upcoming monetary policy decisions from the Federal Reserve, and recent geopolitical developments. With the market waiting for the Federal Open Market Committee (FOMC) minutes and U.S. inflation figures, the main question remains: which direction will gold prices take in the coming period?

I believe many traders are preferring to wait before making significant decisions on gold until the release of the Fed minutes. The minutes are expected to provide a clearer view of the likely path for rate cuts in the U.S. Inflation numbers due in the coming days could also be critical, as their impact will closely align with the Fed’s stance on rate reductions. Historically, gold prices tend to move inversely to the U.S. dollar; rate cuts usually weaken the dollar and increase demand for gold as a safe-haven asset.

Currently, the U.S. dollar index (DXY) is near a seven-week high, adding pressure on gold prices. A stronger dollar reinforces the view that the Federal Reserve may not be in a hurry to make significant rate cuts, especially as expectations of a large reduction at the upcoming November meeting have eased. This scenario, along with a potential ceasefire in the Middle East, has reduced gold’s short-term appeal as a haven.

From an economic and fundamental perspective, it is expected that the Federal Reserve will gradually slow the pace of rate cuts. Investors are factoring in over an 85% chance that the Fed will cut rates by 25 basis points at the November meeting. If that happens, we might see stability or even a rebound in gold prices, especially if economic conditions remain weak and inflation continues to gradually decline.

Many Federal Reserve officials have recently stated that the current monetary policy aims to control inflation without harming economic growth, which may limit gold’s short-term rise. In my opinion, U.S. Treasury yields play a key role in influencing gold. The yield on 10-year bonds has surpassed 4%, increasing the pressure on non-yielding gold. When yields are high, investors prefer to hold assets that provide direct returns, such as bonds, over non-yielding assets like gold.

On the geopolitical front, recent reports of a possible ceasefire in the Middle East have provided some relative easing of tensions in the region. While geopolitical conflicts usually support gold as a haven, any positive developments in this area could contribute to further pressure on the yellow metal.

In my view, gold remains in an unstable position for now, as investors closely watch the FOMC minutes and upcoming inflation data. These events could be pivotal in determining gold’s direction in the coming weeks. Despite the current pressures, any indication of easing inflation or U.S. monetary policy could provide new support for gold. However, the biggest challenge remains how gold will cope with a strong dollar and high bond yields. Therefore, expectations are tied to upcoming economic and geopolitical developments.

• Gule is Senior Market Analyst at XS.com