Is Gold Losing Its Shine? USD Strength and Bond Yields Drive Prices Lower

Gold prices fell into a sustained tailspin and plunged to the lowest levels in two months. The plunge is a result of a collective impact of a rallying US dollar, growing Treasury bond yields, and market expectations of economic policies during the tenure of President-elect Donald Trump. The yellow metal's role as a safe haven asset faces significant challenges as global markets respond to shifting financial and economic dynamics.

Key Takeaways

• Gold eased for the fifth consecutive session and is currently trading below the $2,560 mark.

• Primarily, the strength of the USD and rising yields by Treasuries are some of the key factors that triggered the fall.

• Mostly, Donald Trump's economic policies were believed to be factors that have created a very inflexible environment against gold. In this line of thought, his inflationary tariffs, added to tax cuts, seem to be major reasons for the current struggles of the gold market.

• The cautious position that the Federal Reserve has held with respect to rate cuts is already telling on the short-term path that gold has taken so far.

Gold Losing Its Shine? USD Strength Gains Momentum

The inexorable rise of the US dollar, further supported by the so-called Trump trades, has taken its toll on gold prices. Optimism over stronger US economic growth and expected fiscal policies has propelled the USD to levels last seen in late 2023. The surge has increased the price of dollar-denominated gold for international buyers, thereby depressing demand.

Besides, strong U.S. dollar performance eclipsed the safe-haven appeal of gold-more so in those markets that widely expect further growth on the back of expansionary economic policies.

Gold Selloff: Role of Treasury Bond Yields

This would have added to the pressure on non-yielding assets such as gold, amidst rising US Treasury bond yields. The yield on the 10-year Treasury note has remained close to multi-month highs, thereby pulling investor capital away from gold. Higher yields increase the opportunity cost of holding gold, which does not pay income, further dulling its attraction.

This could be a reflection of increasing market sentiment that inflationary pressures may force the Federal Reserve to stop its rate-cutting cycle, hence capping further upside in gold for some time.

Impact of Trump's Economic Policies on Gold

The surprise election victory by Trump has set off expectations of dramatic fiscal policies, such as tariffs and tax cuts. While a fiscal policy of this nature could lead to economic growth, it's also considered to be inflationary. A prospect for higher inflation raised doubts over the Federal Reserve's ability to continue with monetary policy easing, thus further reducing gold's appeal.

What's more, the policies of Trump reshape the global trade dynamics, meaning that the market is facing uncertainty. Investors, though remain blind to that fact because traditional volatility hedge-gold-continues to be shunned in favor of better prospects elsewhere, such as in the equity and bond markets.

Technical Analysis: Support and Resistance Levels

From a technical standpoint, the breakdown of gold below $2,600, an important Fibonacci retracement level, has given ground to a further slide. The closest support is sought at $2,542-$2,538, where the 100-day SMA and 50% Fibonacci level come together. A failure to hold in this zone could force prices to test the psychological $2,500 level.

On the other hand, any bounce is likely to find resistance near $2,580, with more solid barriers at $2,600 and $2,630. These levels will be important, determining if gold is actually able to break its bearish course.

Global Factors Adding to Gold's Struggles

But it is not only the domestic factors that have contributed to the woes in gold. Global economic uncertainties, including China's sluggish recovery and the cautious policy stance of the European Central Bank, have also weighed in on investor sentiment. The recent stimulus measures taken by China have failed to lift commodity demand, placing a dent on gold's prospects as a hedge against geopolitical and economic risks.

Other haven assets, such as the Japanese Yen, also became less in demand, further underlining a lack of urgency on the part of investors to make a beeline for the safety of gold.

Market Sentiment and Fed Policies

Market sentiment remains cautious, with policymakers from the Federal Reserve still focused on adjusting rates in a measured manner. Indeed, recent comments from Fed officials sounded warnings about sticky inflation, setting some limitations on the scope for further easing. It has boosted expectations for an interest rate cut in December, although the chances are still subject to incoming economic data.

Given the PPI and comments from Jerome Powell, head of the Federal Reserve, traders will be further attentive to more hints of the Fed's policy trajectory and its implications for gold prices.