Demand for gold has been climbing lately due to three main factors: geopolitical risks, a surge in central bank purchases, and expectations of the Federal Reserve's interest rate cuts.
However, the outlook for at least two of these factors has shifted, suggesting there may be less room for gold to reach new highs — and it might even struggle to maintain its current levels.
A key driver of demand for the defensive asset could be the easing of tensions in the Middle East, as the Israel Defense Forces (IDF) struck 20 targets in Iran after a 25-day wait.
As concerns about an Israeli attack on Iranian nuclear and oil facilities, or even the residences of senior officials, have not materialized, the markets have relaxed, and the price of oil has fallen.
A further escalation is not expected, at least until the US elections next week, as it would be against the interests of the ruling party. The message to strategic partners is likely to be to cool things down.
Beyond that, it is difficult to predict. Still, given that the Israeli economy is already feeling the effects of a year of conflict, an extension of the situation would not be ideal.
So, for now, one of the growth drivers seems to be losing momentum. On the other hand, there are still plenty of potential conflicts around the world, particularly in the Asia-Pacific region.
As for the second factor, China and India have been buying hundreds of tons of gold since early 2022, and their demand for physical gold continues to rise, affecting XAUUSD rates.
The Germans and Swiss are the most active buyers among Europeans. There haven't been any major changes on that front, which means the threats of a price drop for gold should remain limited.
Regarding the Fed's easing monetary policy, until recently, the markets anticipated further cuts to the key interest rate thanks to ongoing disinflation trends. However, that outlook has changed a bit.
We’ve seen robust economic data from the U.S., including a recent uptick in business activity: the preliminary S&P PMI business activity index rose to 54.3 in October, up from 54.0 in September.
However, this outlook could change if Trump wins the elections and escalates the trade war with China and the rest of the world, including Europe, by imposing 60% tariffs.
Such moves would likely trigger a spike in inflation, forcing the Fed to rethink its plans for rate cuts. So, while his victory might boost Trump stock, it wouldn’t be great for the overall economy.
For gold, it's a double-edged sword. Trump’s actions could disrupt Fed rate cuts and heighten geopolitical tensions, potentially accelerating de-dollarization.