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(Kitco News) – So far Israel’s war with Hamas has been within Gaza’s borders, and as the world braces for conflict in the Middle East, gold may lose its safe-haven appeal.
Gold prices failed to hold above $2,000 an ounce as focus returns to the Federal Reserve’s monetary policy, which supports U.S. dollar strength and higher bond yields that remain within reach of 5%.
December gold futures last traded at $1,993.60 an ounce, down 0.59% on the day. The renewed selling pressure comes a day before the Federal Reserve releases its latest monetary policy statement.
Ricardo Evangelista, senior analyst at ActivTrades, notes that gold remains in a tug-of-war with the market, supported by geopolitical uncertainty and weighed down by the Federal Reserve’s restrictive monetary policy stance.
“The conflict in Gaza is the focus of attention, and as Israel’s ground invasion appears to be taking shape, financial markets continue to price in the risk of escalation, driving demand for safe-haven gold,” he said in a note on Tuesday. “At the same time, the US dollar remains strongly supported relative to other major currencies, with the index measuring its performance near the two-year high hit earlier this month. The Federal Reserve is meeting this week and there is still some uncertainty about whether Jerome Powell and his colleagues will raise interest rates again. This uncertainty keeps the dollar supported and Treasury yields remaining high, limiting the upside for gold generated by port trading.”
Markets expect the Federal Reserve to leave interest rates unchanged after Wednesday’s policy meeting; However, expectations are growing that the central bank could maintain restrictive interest rates until the first half of 2024.
“The Fed is likely to maintain broadly hawkish policy, consistent with the September dot plot,” said fixed income analysts at TD Securities. “However, the committee will reiterate that it aims to “proceed cautiously” when formulating next policy steps. .”
Commodities analysts at Commerzbank said any hint from Federal Reserve Chairman Jerome Powell that a rate hike was still on the table at the December meeting could put more near-term pressure on gold.
They added that markets will also be watching Friday’s non-farm payrolls data for signs of a market slowdown.
“If this fails to happen again, a Fed rate hike in December could become more likely again. Although interest rate expectations have recently had less of an impact on the gold price, that does not necessarily mean that this will remain the case in the coming weeks,” said the analysts. “We therefore caution against assuming that the upswing in gold we have seen in recent weeks will simply continue as it is due to exceptional circumstances.”
Alex Kuptsikevich, senior market analyst at FxPro, said gold faces an uphill battle as resistance at $2,000 continues.
Kuptsikevich added that with 10-year bond yields hovering around 5%, this could be an attractive entry point for investors that would move investment capital away from gold.
“As more major central banks move from an active rate-hiking mode to a wait-and-see approach, the moment for policy change is approaching. “This increases the attractiveness of long-dated bonds, gold’s main competitor,” he said. “The attractive yield on government bonds justifies selling gold under the current circumstances.”
In the current environment, it is more likely that gold prices will fall closer to $1,800 than rise to $3,000.
According to some analysts, gold prices will need to significantly exceed $2,000 per ounce if it wants to retain its current luster.
“Despite making short moves beyond this key psychological level, it is currently failing to gain traction,” said Craig Erlam, senior European market analyst at OANDA. “This underlines once again how big the resistance level is and whether it is even possible. If we take a significant step up, it could accelerate as a result.”
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