Gold steadies as traders brace for US presidential election outcome uncertainty
- Gold steadies on Tuesday, having reached a new five-day low earlier in the day as the US presidential election remains a question-mark event.
- The election could be polarizing for the US Dollar, impacting Gold, or even be a “win-win” for the precious metal.
- Technically, there are signs XAU/USD is entering a short-term downtrend.
Gold (XAU/USD) continues to backslide from its record high, eventually finding support at $2,724 early on Tuesday and bouncing back to regain the $2,740s. A marginally weaker US Dollar (USD) due to uncertainty over the US presidential election result is aiding Gold in its rebound, since the precious metal is mostly priced and traded in USD.
This comes as markets increasingly view the final result of the election as polarizing for the US currency, with a victory for Republican nominee Donald Trump USD-bullish but the opposite for Democrat nominee Kamala Harris.
Simmering tensions in the Middle East also keep Gold supported, after Iran's supreme leader, Ayatollah Ali Khamenei, said that the US and Israel "will definitely receive a crushing response," to Israel’s attack last month. Further, overweight long-positioning from trend-following hedge funds is also helping the yellow metal sustain its current highs.
Gold rises ahead of US presidential election result
Gold rises from safety flows due to the high level of uncertainty regarding the outcome of the US presidential election, which regardless of the winner alone can be bullish for the yellow metal.
“Regardless of the outcome, significant political shifts can unsettle financial markets, and such uncertainty typically fuels volatility, and both can serve as catalysts for higher Gold prices,” says Matthew Jones, precious metals analyst at Solomon Global.
The highly-rated election forecaster 538.com indicates a 50% probability of Vice President Harris winning on Tuesday whilst former President Donald Trump has a 49% chance of victory. That leaves a 1% chance of no overall winner. Over the last 24 hours, Harris has edged into the lead after lagging Trump for several days. This may also explain Gold’s turnaround on Tuesday.
Solomon’s Jones is bullish on Gold overall, seeing the election outcome as a “win-win” for the precious metal regardless of which candidate is victorious.
A Trump in the White House would lead to “inflationary pressures and geopolitical tensions,” according to the analyst, which could, “amplify Gold’s appeal as a safe-haven asset, driving demand upward.”
On the other hand, if Harris wins, the Democrat nominee “has outlined a vision marked by robust government expenditure on social programs, infrastructure, and climate initiatives,” writes Jones, adding that these policies “may exacerbate budget deficits, potentially weakening the (US) Dollar and stoking inflation fears. Investors could increasingly turn to Gold as a hedge (...) pushing prices higher.”
Technical Analysis: Short-term trend might have reversed
Gold could be showing signs of reversing its short-term uptrend as it continues steadily leaking lower.
XAU/USD 4-hour Chart
Although the precious metal remains in an uptrend on a medium and long-term basis, the establishment of a sequence of falling peaks and troughs on the 4-hour chart could be one of the first signs of a short-term downtrend taking root. Given the technical principle that “the trend is your friend,” this now might tilt the odds in favor of even more downside in the near term.
A break below the $2,724 day’s lows would add further confirmation to the short-term downtrend thesis and probably see prices fall to the bottom of the recent range at $2,709.
The Relative Strength Index (RSI) is also showing bearish divergence (red dashed lines on chart) when comparing the current price level to that on October 23. The RSI is lower than it was on October 23, whilst price remains higher, and this indicates underlying selling pressure is strong.
Alternatively, given the medium and long-term bullish trends, it is also possible that a recovery could unfold. In such a scenario, a break above the all-time high of $2,790 would probably lead to a move up to resistance at $2,800 (whole number and psychological number), followed by $2,850.
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.
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