This is just the start for gold, even if ATHs remain out of reach

(Kitco News) – Chaos in the Middle East appears to be contained within Gaza as Israel continues to wage its war against Hamas; however, the static geopolitical environment is taking its toll on gold as prices appear stuck at $2,000 an ounce.

Although October’s monthly close was an all-time high for the precious metal. Some investors are probably feeling slightly frustrated that gold doesn’t have the juice to achieve this goal in absolute terms. With gold prices ending the week at $2,002 an ounce, the market is about 4% away from its 2020 all-time highs.

$2,000 represents a major long-term resistance point for gold, so prices will have to consolidate or fall back a little for a running start to push to $2,100 an ounce.

With this in mind, it’s not surprising that gold is losing some momentum. We have noted a few times in this newsletter that specific geopolitical events do not provide sustainable momentum for gold. The problem with safe-haven demand is that the market needs events to escalate constantly. Once tensions calm or at least don’t ratchet up, the need for a safe-haven starts to wane.

At the same time, unfolding world events is creating a very volatile market. This week, the World Bank said it sees gold prices rising 6% in 2024, driven by geopolitical uncertainty.

“The conflict in the Middle East is set to lead to heightened global uncertainty, with substantial implications to gold prices if the conflict escalates. Although the initial impact has so far been moderate, its escalation would exacerbate such uncertainty, which would lead to reduced risk appetite as well as lower consumer and investor confidence,” analysts at the World Bank said in the report.

But it’s not just what is happening in the Middle East that is impacting gold; analysts have said that they are expecting the precious metal to remain well supported at current levels as overall geopolitical uncertainty remains elevated.

Specific events will gain market attention and then fade into the background, but chaos and volatility are not going away anytime soon. An unwind of the decades-long globalization, the global de-dollarization trend, the green energy transition, and the need to develop domestic supplies of critical materials continues to destabilize the world and fuel geopolitical uncertainty.

In this environment, we should expect to see volatile gold prices in an upward-sloping trend line.

Adding to the geopolitical uncertainty, there are growing fears that the global economy remains on track to fall into a recession despite how resilient U.S. consumption has been.

We can already see signs of slowing growth as the U.S. labor market starts to cool. Friday, the Bureau of Labor Statistics said the U.S. economy created 150,000 jobs last month, missing expectations for gains of around 178,000 jobs. The unemployment rate rose, and wage growth was also weaker than expected.

Weaker-than-expected economic data will ensure that the Federal Reserve is done raising interest rates, even as it continues to maintain a tightening bias.

While geopolitical events will create short-term momentum in gold, an eventual shift in the Federal Reserve’s monetary policy could be a bigger factor for sustainably higher prices.

Although prices rose nearly 9% in the last four weeks from their seven-month lows, a lot of that was due to a shift in speculative positioning. Long-term investors have still avoided the market as holding in gold-backed exchange-traded products remained fairly stable through October.

Analysts have noted that long-term investors are hesitant to get into the gold as the Federal Reserve maintains its tightening bias. Higher interest rates will push both the U.S. dollar and bond yields higher, creating two significant headwinds for gold.

Investors should come back to gold as these headwinds start to fade as markets see the Fed’s next move as a cut.

That’s it for this week. Have a great weekend