Gold May See Near-term Retracement Due To Stronger Dollar, Yields: WGC Report

Gold prices dipped in early November due to a stronger performance of the U.S. dollar and rising bond yields, notes the latest World Gold Council (WGC) report. This dip was closely followed by a recent peak when the global economy was weighed down by geopolitical turmoil.

Gold prices often reflect the broader economic landscape, and recent shifts suggest that the yellow metal may be entering a period of retracement, largely shaped by a complex mix of geopolitical factors, investor sentiment, and macroeconomic conditions.

According to WGC’s Gold Return Attribution Model (GRAM), gold took a hit because of the strength in the US dollar, the lagged gold price, and certain momentum factors such as:

- Gold ETF outflows coming off an exceptionally strong month

- Drop in COMEX net managed money net longs which reflected the likely unwind of pre-election hedges. The COMEX net positioning fell 74 tonnes, an 8 per cent drop from the prior week

- The correlation between gold and the dollar goes something like this: a stronger dollar typically dampens demand for gold as it becomes more expensive for the holders of other currencies

Additionally, rising yields which signal an increased return on safer investment options, divert investor attention from non-yielding assets like gold.

In the first week of November, global gold ETFs noted substantial outflows with an estimated $809 million exiting the market. These outflows largely originated from North America, where investors reacted to political and economic development.

However, some strong inflows persisted in Asian markets, the WGC report states.

U.S. Election Impact On Gold

The 2024 U.S. elections, won by Donald Trump, have introduced volatility to financial markets. This affected various asset classes including gold. The WGC report states that gold’s dip can be partly attributed to renewed investor confidence in equity markets, a strong dollar, and increased bond yields. The anticipated policy stance of the current U.S. administration likely influences all these factors.

How’s the Outlook For Gold Looking?

While short-term headwinds may continue to impact gold prices, the WGC report suggests that fundamental support for gold remains upbeat. The support here relates to persistent inflationary concerns, high debt levels, and ongoing geopolitical tensions that act as factors that will influence future gold demand.

Moreover, the WGC report further points out that gold buying has become increasingly driven by Asian markets. This trend is likely to persist if U.S. fiscal policies focus on tariffs, immigration controls, and tax cuts that impact global equity markets, particularly in Asia.

“The US election results have taken a bit of a knee-jerk sting out of gold’s impressive y-t-d rally. Suggested reasons are a continued strengthening in bond yields and the US dollar, risk-on sentiment in equity markets, a boost to cryptocurrencies, and a quelling of geopolitical tensions. These factors might presage a welcome pause, even a healthy near-term retracement, for gold,” the WGC report states.

Even though gold’s near-term challenges continue to overlay, the WGC is optimistic that these retracements may be temporary. Global investors may continue to view gold as a valuable hedge against economic uncertainty.