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Gold Recovers From Deep Sell-Off

Gold markets have managed to partly pare back losses and reverse a deep selloff over the past couple of days after Friday’s surprise attack by Hamas on Israel, overcoming negative sentiment triggered by the Fed’s hawkish outlook of higher-for-longer interest rates as well as a brawny dollar.

Gold prices have gained 2.3% since Friday to trade at $1,860.30 per ounce in Tuesday’s intraday session, reversing a nearly 7% decline since late September with the yellow metal trading above $1,930 per ounce on September 20.
Gold not only plays an important role in portfolio diversification but can also be an effective hedge against uncertainties. Gold traded near all-time highs for most of last year, with the commodity in high demand as a geopolitical hedge due to Russia’s war in Ukraine and also demand for an inflation hedge. But rising interest rates and a strengthening dollar have both effectively killed the gold rally in the current year.

Thankfully, Saxo Bank head of commodity strategist Ole Hansen has predicted that Middle East tensions may mean the Fed will not”…continue to hike rates into increased uncertainty, and the prospect for peak rates have suddenly moved closer despite the potential inflationary impact of higher oil prices,” which could signal a low in gold prices,

Macro headwinds persist

That said, a full steam ahead gold rally is far from assured thanks to a plethora of headwinds. Gold prices have eased a bit in Tuesday’s session even as Israel launched a furious retaliatory attack on Hamas and gold still in oversold territory, indicating that the bears are not about to keel over.

Commodity analysts have reported that tactical investors have significantly cut their exposure to gold, scaled back platinum positioning, but increased silver and palladium exposure. According to the analysts, macro headwinds persist for gold, having built following the hawkish September Fed meeting. They note that gold prices initially held up well, supported by the physical market holding up the price floor. But the decline in equity markets, elevated nominal and real yields, as well as expectations for rates to remain higher for longer all weighed on gold, resulting in a breach of key support levels. Gold is now trading at lows it reached in March 2023,

the last time 2Y yields were trading at similar levels, suggesting gold prices might not have much downside potential either.

StanChart’s FX strategists expect the USD to hold onto its recent strength for a little longer. They note that US economic activity has been stronger than expected and the USD has largely tracked rate differentials, saying the dollar might not weaken materially until mid-2024.

On the bullish side of things, StanChart has observed that whereas other asset markets suggest risk-off sentiment, particularly given the move higher in the U.S. dollar, gold has not benefited from the same sentiment. They have argued that gold markets are not pricing in a significant premium on the risk of a U.S. government shutdown especially after the ouster of Kevin McCarthy’s from the House speakership increased the risk that the U.S. government will shut down in a matter of months.