(Kitco Commentary) - A Democratic majority in Congress has fueled hopes of an end to the Middle East conflict and the reopening of the Strait of Hormuz, pushing gold prices up more than 4% and Brent down over 13%.
If so, this could remove one of the key inflationary pressures keeping central banks hawkish.
And the US is no exception, despite being the world's largest oil producer. In September, for example, US consumer prices rose 3.7% year over year and 0.6% month over month, largely driven by higher fuel costs.
Why? US producers can sell their crude abroad, forcing domestic buyers to compete with overseas customers when geopolitical tensions or supply disruptions drive up global prices.
Add to that a resilient labor market, with 165,000 jobs added in October, well above the 48,000 average over the past 12 months, and unemployment down to 4.1%, hence expectations of another Fed rate hike in December.
The ECB is also expected to hike in December, along with the Bank of England and the Bank of Japan, as high energy prices keep inflation up.
This matters because higher rates hurt not just debt-laden companies but gold as well, since it pays no interest. Hence, Goldman Sachs has cut its year-end 2026 price target from $4,650 to $4,150 an ounce and its 2027 target from $5,400 to $4,800.
However, not everyone is so downbeat about gold's prospects. Economist Peter Schiff, for instance, arguef that with democrats we could see more government spending, tighter regulation, and larger deficits, all bullish for gold.
The conclusion?
First things first, a lot will depend on what central banks, especially the Fed, do next.
For example, if this week's US inflation data comes in cooler than expected, markets could start betting on a less hawkish Fed. A hotter reading, though, could quickly turn those expectations around.
Another big factor is what happens to US domestic and foreign policy when the new Congress takes office in January 2027. If investors start worrying about a growing budget deficit, the country's financial stability, or the dollar's status as a safe haven, the US dollar index could come under pressure, potentially providing further support for gold prices. If investors lose confidence in the dollar, gold could get another boost.
Central banks may also keep buying more gold as geopolitical tensions deepen, the world becomes more divided, and trust between countries wears thin.
Finally, AI could also influence where gold goes next. While chipmakers have significantly reduced the amount of gold used in production, any slowdown in AI demand or a further sell-off in tech stocks could also weigh on gold.