Gold prices were largely on the back foot at the beginning of the week, with the yellow metal falling from its unprecedented record highs.
Though prices have risen 1% on Wednesday, analysts believe that gold is not risk-free.
“The remarkable rise in the price of gold can therefore be explained by strong demand for safe havens in the face of unprecedented economic and political risks, coupled with skepticism toward other ‘risk-free’ assets,” Thu Lan Nguyen, head of FX and commodities research at Commerzbank AG, said in a report.
The fact that gold is the primary beneficiary of this is likely due to the fact that, unlike other traditional safe assets, it is not controlled by a government and/or central bank and is therefore not subject to default risk.
Nguyen stated that in case of a crash in prices, there would be no intervention from the governments to stabilise the market.
This is particularly important to consider as the gold rally is increasingly seen as excessive.
High prices
At the beginning of last week, gold prices reached a record high of $4,381 per ounce. Since last Tuesday, however, prices have cooled down significantly, briefly falling below the $4,000 per ounce mark this week.
However, the precious metal was still trading more than 50% higher since the beginning of the year.
Gold prices saw two significant surges. The first occurred from January to April, resulting in a 25% increase, after which prices stabilized at approximately $3,300 per ounce.
A second, almost 30% increase began in late August, reaching its peak subsequently.
At the time of writing, the December gold contract on COMEX was at $4,041.64 per ounce, up 1.5% from the previous close.
Real interest rates no longer decisive driver
In the past, interest rates played an important role in gold’s movement as the precious metal does not yield interest and is considered “risk-free”.
Gold prices typically decline when US interest rates and real yields rise, as the precious metal becomes a less appealing investment. Conversely, gold investments gain attractiveness when interest rates fall or inflation increases, leading to a decrease in real yields.
Market expectations for US real yields adequately explained gold price movements until mid-2023.
However, this correlation appears to have weakened since then, as real yields have increased substantially without a corresponding negative impact on gold.
“Instead, the precious metal has become noticeably more expensive,” Nguyen said.
Since the beginning of September, real yields have fallen slightly again and gold has risen.
However, the decline in yields was not nearly as sharp as to explain the extent of the rise in the price of gold on its own.
Therefore, other factors have become more influential in driving gold.
Driving factors
Gold is considered a safe haven asset, with its value increasing during times of economic uncertainty.
The initial surge following US President Trump’s inauguration can therefore be attributed mainly to the significant uncertainty surrounding the US government’s introduction of extensive tariffs.
The US government’s unparalleled attacks on the US Federal Reserve, coupled with the fiscal package approved by the US government this summer, which is set to escalate debt levels further, undoubtedly also played a role.
The second surge in gold prices followed Fed Chair Jerome Powell’s speech, which fueled interest rate cut speculation, and a US government shutdown, which heightened economic risks.
This led to increased demand for safe havens and a perception of US assets as less secure, evidenced by strong inflows into gold ETFs.
“In addition to economic concerns, geopolitical developments have also significantly supported demand for gold recently,” Nguyen said.
One indication of this is the increase in gold purchases by central banks.
A mid-year survey by the World Gold Council revealed that geopolitical instability significantly influences central banks’ reserve management.
This factor was cited by 60% of all central banks surveyed, with an even higher proportion—81%—among those in emerging markets.
Gold still well supported
Despite the vulnerabilities, experts believe gold remains well-supported for the time being.
Gold prices corrected sharply after reaching an all-time high just over a week ago, largely due to being significantly overbought according to the daily MACD (moving average convergence divergence).
Although the daily MACD has retreated to more moderate levels, it has not fully reset and still needs to decline further to reach a neutral position, according to David Morrison, senior market analyst at Trade Nation.
Despite a significant initial selloff from its peak, shorter-term MACD indicators hinted that gold was poised for a rebound.
“The question now is if that rebound is over, and if so, will gold resume its decline? In other words, does the bounce reflect short-covering and a pause in selling momentum rather than renewed buying conviction? Unfortunately, it’s just too early to know,” Morrison said.
The gold market is quite volatile at present. And it is likely to remain so, certainly until we hear from the US Federal Reserve tonight, along with any trade deal that Presidents Trump and Xi Jinping may reach on Thursday.
According to Commerzbank, as there are no signs of an end to the war between Ukraine and Russia, demand for gold as a safe haven is unlikely to subside.
“In addition, we expect US real yields to continue to fall in the short term due to lower key interest rates and rising inflation, which will further benefit the precious metal,” Commerzbank’s Nguyen noted.
Despite the already sharp rise in prices, it is therefore unlikely that the recent correction will continue for much longer.
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