Gold prices have pulled back from their recent highs, despite a significant decrease in US yields. It appears that safe-haven flows are reversing as geopolitical tensions ease. For gold to reach new record highs, a recession may be necessary. Even with sinking yields, gold has been unable to gain momentum.
Last week, US government bond yields plummeted, leading to a weakened US dollar. In most cases, both of these events would be positive for gold prices. However, gold was not able to capitalize on these opportunities. Yields represent the price of money, similar to interest rates determined by market forces. Since gold does not generate interest, it becomes more attractive as yields and interest rates drop. Additionally, a weaker dollar makes gold cheaper for foreign investors.
Despite these favorable market conditions, gold has continued to decline, indicating that other factors are at play. The lack of escalation in the Middle East conflict has likely led to decreased demand for safe-haven assets, including gold. Investors who had bet on a larger conflict have likely begun to exit their long positions in gold. The decline in oil prices also supports this view, as it suggests the “war premium” is being priced out.
Another factor that has supported gold prices this year has been direct purchases by central banks, particularly China. Beijing is diversifying its reserves by acquiring gold as a hedge against potential diplomatic tensions with the West. This strategic shift towards gold may continue for years to come as tensions between the US and China persist.
In order for gold to reach new record highs, a significant catalyst may be required. A return to recession fears could trigger a sustainable rally in gold, as could a further decline in the US dollar. However, these scenarios seem unlikely at present, as most economies are in worse shape than the United States.
In conclusion, the performance of gold will depend on a combination of geopolitical tensions, interest rates, central bank purchases, and global economic conditions. In the near term, the outlook for gold seems negative, but the tides could turn next year as the world economy weakens and some regions enter recession, providing the momentum for another rally towards record highs.
