Higher opportunity costs, combined with a Republican sweep, put pressure on gold in early November, pushing the yellow metal lower after hitting an all-time high on the first of the month, according to the World Gold Council.
However, despite the headwinds, gold’s near-term decline is unlikely to “turn into a rout”, according to the council.
“The US election results have somewhat dampened gold’s impressive year-to-date rally,” he said.
“Suggested reasons are continued strengthening in bond yields and the US dollar, risk sentiment in stock markets, strengthening cryptocurrencies and easing geopolitical tensions.”
According to its gold return attribution model, other “momentum factors” that pushed gold lower in the first week of the month included gold price lag and outflows from Gold ETF after an exceptionally strong month.
Meanwhile, global gold ETFs saw outflows of around US$809 million (12 tonnes) in the first week, with the majority of outflows occurring in North America, the data showed.
These capital outflows were partially offset by Asian capital inflows, fueled by fears surrounding a possible resumption of trade wars between the United States and China.
“COMEX net positioning also fell by 74 tonnes, [representing] a drop of 8 percent from the previous week,” the association reported.
The board noted that the pre-election rise in US Treasury yields and the dollar is expected to dissipate, with a potential reversal in the dollar likely to lead to a decline in bond yields, as seen previously.
“After all, the dollar is largely valued based on the real effective exchange rate (REER) and the Trump administration would favor both a weaker exchange rate to encourage exports and lower interest rates low to stimulate borrowing”, we can read.
“However, the Republican victory was accompanied by an acceleration in the rise in yields and a rapid reversal in the dollar index as well – led by a sharp and nervous decline in the euro and yen. ”
The trade association also pointed out that most of the gold price movement in October, a month in which gold finished up 4 percent at US$2,734, occurred during Asian trading hours, indicating that gold took “less cues from U.S. yields and the dollar.” lately.”
Favorable fundamentals
Despite the headwinds, the World Gold Council believes that factors such as reduced sanctions risks, continued pressure on US Treasuries, insufficient nominal bond yields and a possible downward adjustment in US stock indexes focused on technology could support positive sentiment towards gold.
Additionally, although cryptocurrencies are expected to be more favored under the new US administration, heavily technology-weighted equity markets could also benefit from the expected pro-business policies.
The board said any adjustments to already rich stock market valuations resulting from expected favorable tax policies would be quickly priced in. However, if there were a reduction in things like the Science Act or CHIPS (the Clearing House Interbank Payments System), then that would likely result in a downward adjustment in the technology segment of the US stock market.
“If the administration does not reduce this spending, deficit issues will continue to be a problem and this, all things being equal, is positive for gold,” the board said.
Expectations of reduced sanctions risks should also drive positive sentiment towards gold.
“Yet, despite these headwinds, we believe there is still fundamental support for gold. And if it is a retracement, we do not expect it to turn into a rout,” the board said.
The Council warned, however, that these factors mask underlying and more fundamental concerns, such as possible global protectionism caused by ongoing conflicts, as well as highly valued and highly concentrated equity markets.
At the same time, cryptocurrencies are likely to remain “a marginal consideration and will not replace gold” as there are currently a large number of sellers, given that investors have not added much gold, outside of futures contracts.
