Gold falls 7.0% in November so far
- Gold trades substantially lower due to pressure from US political factors.
- It has weakened nearly 7.0% in November so far as a result of Donald Trump and the Republican’s political gains.
- XAU/USD breaks through a major trendline and declines to the 100-day SMA.
Gold (XAU/USD) is trading down 7.0% from its peak so far in November as markets absorb the impact of the seismic shift in US politics that has occurred since the election of former President Donald Trump.
The precious metal further extends its decline on Thursday, breaking below a major trendline and reaching the $2,540s after the news that the Republican Party has won a majority in the US Congress, which means it now controls the White House, Senate and the House of Representatives.
Control of the legislature will enable Trump to push through economic policies that the market gauges as inflationary but also broadly positive for the US Dollar (USD). Gold is falling because a stronger US Dollar is negative for the precious metal, which is mainly priced and traded in USD.
The outlook for interest rates is offsetting this effect, particularly after the release of recent US inflation data. This helped reassure markets that the Federal Reserve (Fed) would push ahead with an expected 25 basis point (bps) (0.25%) interest rate cut at its December meeting. Lower interest rates are generally positive for non-interest paying Gold because they increase its attractiveness in the eyes of investors compared to other assets.
Gold declines as trend-followers exit and traders turn to other assets
Gold is also suffering due to outflows from Gold Exchange Traded Funds (ETFs), which allow investors to purchase “stocks” in Gold, enabling them to hold the commodity without actually purchasing physical Gold bullion. Gold ETFs shed around $809 million (12 tonnes) net in early November, driven by North American outflows and partially offset by Asian inflows, according to the World Gold Council (WGC) data.
Part of the reason for the outflow is likely major hedge funds exiting their huge long positions after riding the uptrend to the October record highs. Another could be competition from alternative assets such as Bitcoin (BTC), which is trading above $90,000, at new all-time highs, because of expectations the Trump administration will relax crypto regulation.
US stocks are also rising as investors anticipate lower corporation tax and looser regulations, boosting company profits, and this might also be diverting funds away from the precious metal.
Demand for Gold is also falling in China, the world’s largest consumer of the yellow metal, amid an economic slowdown that is expected to accelerate as the new US administration steps up its trade war with the country.
Gold generally rises as a result of investors seeking safety amid a rise in geopolitical risks. These may now wind down if Donald Trump can hold true to his promises to bring an end to conflicts around the globe. The news that South Korea has made a U-turn on promises to send lethal aid to Ukraine on Thursday, whilst far from reassuring to Ukraine, could be taken as a sign of tentative moves towards de-escalation.
In the Middle East, meanwhile, although the bombings continue, attempts are being made to agree to a US-led ceasefire in Lebanon before the Biden administration hands over control to Donald Trump’s government. The odds of success, however, remain slim, according to a Reuters report.
Trump’s appointment of Former Arkansas Governor Mike Huckabee as Ambassador to Israel could further inflame the conflict. Huckabee is a known Zionist and supporter of Israeli Prime Minister Benjamin Netanyahu. He has said he does not support a two-state solution to the Israeli-Palestinian problem and sees the West Bank as belonging to Israel. His appointment could embolden Israel to make more audacious attacks. If so, it could drive safe-haven flows to Gold.
Technical Analysis: XAU/USD breaks below major trendline and continues south
Gold breaks cleanly through a major trendline and extends its decline. According to technical analysis, the precious metal is now in a short and probably medium-term downtrend, and, given it is a principle of technical analysis that “the trend is your friend,” the odds favor a continuation lower.
XAU/USD Daily Chart
Gold has now fallen to the next support level and target at around $2,540 and the 100-day Simple Moving Average (SMA).
A decisive break below the 100 SMA would indicate yet more weakness to the next target at around $2,477 and the July and August highs.
The precious metal remains in an uptrend on a long-term basis, raising the risk of a reversal higher in line with its broader up cycle.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.