Gold skyrockets on heightened geopolitical tensions
|- Gold prices rose as investors turned to safe havens due to escalating geopolitical risks.
- US Treasury yields declined, and a weaker US Dollar contributed to the rise in gold prices.
- Sentiment turned sour following Putin's nuclear doctrine approval and mixed signals from Russian officials.
Gold posted back-to-back positive days of gains, climbing some 0.70% on Tuesday due to risk aversion amid heightened tensions in the Russia-Ukraine conflict. Market players seeking safety flock to the golden metal, which has risen above $2,600 after dipping to a two-month low of $2,536.
The XAU/USD trades at $2,629 at the time of writing. Falling US Treasury yields, and a soft US Dollar lifted the golden metal amid a scarce economic docket. However, precious metals rose due to geopolitical risks following Russia’s massive attack on Ukraine, while US President Joe Biden authorized the use of America-made long-range missiles inside Russia.
According to TASS, Russia’s President Vladimir Putin approved the nuclear doctrine in retaliation. This triggered a risk-off sentiment, with global equities dropping while Greenback and Gold advanced.
Lately, Russian Foreign Minister Lavrov stated that his country believes nuclear war will not happen.
Aside from this, the US economic schedule revealed that US housing data for October missed the mark, while Kansas City Fed President Jeffrey Schmid crossed the wires.
Schmid said it remains uncertain how far rates would need to fall, but it is reassuring that the decisions were taken amid growing confidence that the Fed is on track to achieve its 2% goal.
The Fed is expected to lower borrowing costs for the third straight meeting in December. Nevertheless, recent data has witnessed investors trimming the odds from a 62% chance of an imminent cut of 25 basis points (bps) to 58%, according to CME FedWatch Tool data.
Ahead of this week, the US economic schedule will feature Initial Jobless Claims, S&P Global Flash PMIs, and the University of Michigan (UoM) final reading of Consumer Sentiment for November.
Gold shines despite a firm US Dollar
- Gold prices recover as US real yields, which inversely correlate with bullion, fall three basis points to 2.05%.
- The US Dollar Index (DXY), which tracks the buck's performance against a basket of six currencies, is flat at 106.17.
- Market players continued to digest Donald Trump’s victory in the US Presidential Election on fears that tariffs and lower taxes are potential drivers of inflation and might slow the Fed’s easing cycle.
- US Treasury bond yields were also pressured ahead of the weekend, with the 10-year benchmark rate down two basis points to 4.39%.
- US Building Permits in October improved compared to September but dropped -0.6%, from 1.425 million to 1.416 million.
- Housing Starts for the same period tumbled for the third consecutive month, contracted by 3.1%, from 1.353 million to 1.311 million.
- According to data from the Chicago Board of Trade via the December fed funds futures contract, investors are pricing in 24 basis points of Federal Reserve rate cuts by the end of 2024.
- On Monday, US President Joe Biden authorized Ukraine's use of long-range missiles inside Russia, CNN revealed. The decision comes as a reaction to thousands of North Korean troops being deployed in support of Moscow’s war effort.
Gold price recovers as buyers target 50-day SMA
Gold price uptrend remains intact, with buyers gathering steam as the golden metal approaches the 50-day Simple Moving Average (SMA) at $2,655. On further strength, XAU/USD could rise and challenge the November 7 high of $2,710, followed by the psychological $2,750 mark.
On the flip side, if Gold drops below the 100-day Simple Moving Average (SMA) at $2,550, sellers could target the November 14 swing low of $2,536. Once cleared, XAU/USD's next stop would be $2,500.
The Relative Strength Index (RSI) remains bearish, but it is closing into the neutral line, indicating that Gold buyers are gathering short-term momentum.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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