According to the World Gold Council, higher opportunity costs, combined with a Republican clean sweep, pressured gold at the start of November, pushing the yellow metal lower after reaching all-time high on the first of the month.
However, despite the headwinds, it is unlikely that the near-term pullback in gold will “develop into a rout”, according to the council.
“The US election results have taken a bit of a knee-jerk sting out of gold’s impressive year-to-date rally,” it said.
“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.”
According to its Gold Return Attribution Model, other “momentum factors” that pressured gold lower in the first week of the month included the lagged gold price and gold ETF outflows following an exceptionally strong month.
Meanwhile, global gold ETFs experienced outflows of approximately US$809 million (12 tonnes) within the first week, with the majority of outflows occurring in North America, according to data.
These outflows were partially offset by Asian inflows, driven by fears surrounding the potential resumption of the trade wars between the US and China.
“COMEX net positioning also fell 74 tonnes, [representing] an 8 per cent drop from the prior week,” the association reported.
The council noted an expectation that the pre-election run-up in US Treasury yields and dollar would dissipate, with a potential reversal in the dollar likely leading bond yields lower, as previously seen.
“After all, the dollar is richly valued on a real effective exchange rate (REER) basis and a Trump administration is said to favour both a weaker exchange rate to encourage exports and lower interest rates to spur borrowing,” it said.
“However, the Republican sweep has gone hand-in-hand with an acceleration of the run-up in yields and a quick reversal higher in the dollar index as well – driven by a sharp and nervous move lower in the euro and yen.”
The trade association also highlighted that most of the gold price action in October, a month in which gold ended 4 per cent higher at US$2,734, occurred during Asian trading hours, indicating that gold has been taking “fewer cues from US yields and the dollar of late”.
Some of the Asian buying, it noted, may have been “sanction-related”, while Trump’s proposed tariff policies could put additional pressure on Asian equity markets.
Supportive fundamentals
Despite the headwinds, the World Gold Council believes that factors such as reduced sanction risks, continued pressure on US Treasury bonds, insufficient nominal bond yields and potential downward adjustment to the tech-driven US equity indices may support positive sentiment towards gold.
Moreover, while cryptocurrencies are expected to be more in favour under the incoming US administration, the heavily technology-weighted equity markets may also benefit from the expected business-friendly policies.
The council stated that any adjustment to already rich valuations of equity markets from expected favourable tax policies would be quickly priced in. However, if there was a cut to things like the Science Act or the CHIPS (the Clearing House Interbank Payments System), then it would likely prompt downward adjustment for the technology segment of the US equity market.
“If the administration doesn’t roll back those expenditures, deficit concerns will continue to pose an issue and that is – all else being equal – gold friendly,” the council said.
Expectations for reduced sanction risks are also expected to drive positive sentiment towards gold.
“Yet despite these headwinds, we believe there’s still fundamental support for gold. And if it’s a retracement, we don’t expect it’ll develop into a rout,” the council said.
However, the council cautioned that these drivers mask underlying and more fundamental concerns such as potential world protectionism driven by ongoing conflicts, as well as richly valued and highly concentrated equity markets.
Meanwhile, cryptocurrencies will likely remain “a marginal consideration and not a replacement for gold” as there is currently a large number of sellers, given that investors have not added much gold, outside of futures.
