(Kitco News) - In one week, Americans will officially head to the polls to elect a new Congress and President. With the polls too close to call in most battleground states, uncertainty continues to surge through financial markets, prompting investors to turn to gold as a reliable safe-haven asset.
Renewed safe-haven demand for gold has helped push prices within striking distance of recent highs.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that U.S. political uncertainty is the driving force behind the new safe-haven demand across commodity markets.
“Given the lack of response to the Middle East de-escalation seen in crude oil prices—which slumped the most in two years on Monday—we conclude that the latest strength is increasingly being seen as a hedge against a potential 'Red Sweep' at the November 5 U.S. election, where one political party, in this case, the Republicans, controls both the White House and Congress,” Hansen said in a note. “This scenario raises concerns about excessive government spending, pushing the debt-to-GDP ratio higher while fueling inflation fears through tariffs on imports, as well as geopolitical risks. Investors are turning to precious metals as protection, even as expectations for lower rates and easier financial conditions fade, as the FOMC may end up being forced to pause the current rate-cutting phase.”
At the same time, some analysts have noted that a Democratic sweep next week could also increase government spending and push debt levels even higher.
Hansen added that due to current market positioning, there are growing risks to the downside.
“If the result next week is not a sweep, we could potentially see a quick $100-$150 correction,” he said.
However, looking beyond the current volatility, Hansen said that the price action, while elevated, does not appear overextended.
“I see no sign of euphoria in the gold market, simply a metal that has rallied by more than 30% this year as investors around the world seek protection against multiple uncertainties, all pointing to an unsettled world. The main drivers of this bullish phase include concerns over fiscal instability, safe-haven demand, geopolitical tensions, de-dollarization driving strong demand from central banks, Chinese investors turning to gold amid record-low savings rates and worries about the property market, and recently increased uncertainties surrounding the U.S. presidential election,” Hansen said.
Looking ahead, Hansen noted that gold still has room to move higher as institutional investors are only just beginning to re-enter gold-backed exchange-traded funds (ETFs).
Krishan Gopaul, Senior Market Analyst at the World Gold Council, noted in a social media post Wednesday that the ETF market saw inflows of around 15 tonnes valued at $1.4 billion last week. At the same time, ETF demand so far this year has turned positive, up by about eight tonnes.
“Asia led the inflows, driven mostly by Chinese funds, followed by North America,” he said.
Although many analysts continue to highlight gold’s potential as the Federal Reserve starts a new easing cycle, some are also beginning to question how much momentum remains in the gold market, especially as the economy and labor market remain relatively resilient.
Market analysts have observed that optimistic views on the economy are pushing 10-year bond yields to a three-month high. The yield on 10-year notes is currently trading at 4.32%.
Fawad Razaqzada, Market Analyst at Forex, said that higher bond yields and a stronger U.S. dollar pose a significant risk for gold in the near term.
“The high opportunity cost of non-yielding assets like gold is becoming increasingly evident as bond yields soar. Meanwhile, lingering U.S. election uncertainties may provide some support, yet without significant new drivers, gold buyers may find themselves on pause until a clearer correction emerges,” he said. “Should yields and the dollar maintain their momentum, we may see the gold outlook soften in the near term as the cost of holding non-yielding assets climbs. No such sign has been evidenced yet, though.”
Ricardo Evangelista, Senior ActivTrades Analyst at ActivTrades, said that prices are likely to remain supported around the current levels; however, he added that gains could be limited in the near term.
“Traders are expected to proceed cautiously ahead of several key data releases at the end of the week. With the Personal Consumption Expenditures index—considered the Fed’s preferred inflation measure—GDP figures, and the crucial non-farm employment data all scheduled for release, a range of factors could influence the Federal Reserve's rate-cutting plans,” said Evangelista, in a note. “Ultimately, these factors will shape the performance of the dollar and bond markets, which, given their inverse correlation with gold, will also impact the precious metal’s prices.”
