Gold falls below $2,700 as bond yields surge on Trump return

6 Kasım 2024

Written by Samer Hasn, Senior Market Analyst at XS.com

Gold is retreating significantly today, falling below $2,700 per ounce in spot trading at the peak of the declines, erasing November’s gains.

The drop in gold prices comes as the US dollar and Treasury yields are on track to record their biggest daily gain this year as Donald Trump returns to the White House for a second time.

Trump has secured 277 Electoral College votes with most of the votes counted, according to The Associated Press figures.

As the results unfolded, Treasury yields were on an upward trend, with the 10-year note rising 200 basis points to 4.477%, the highest level since early July. Meanwhile, the two-year yield was less aggressive, gaining about 100 basis points. The yield differential is set to widen the fastest in favor of 10-year Treasuries this year, by nearly 100 basis points. The Dollar Index also rose more than 1.7%, reclaiming the 105-point level for the first time since July.

This may reflect market expectations that inflation will return to the rise in the long term, in light of the economic policies that Trump will implement when he returns to the White House early next year. These policies are intended to be protectionist and threaten to return to trade wars between the United States and its major trading partners, and ultimately aim to reduce dependence on imports.

Market pricing in a return to rising inflation may mean that the Fed will be less lenient with interest rate cuts over the next year or beyond, which may feed back into the main pressures on gold to decline.

That said, the probability of a 25-basis point rate cut in January, assuming there will be a half-point cut this year, has declined from 69% a month ago to 32% today, according to the CME FedWatch Tool.

The impact of these policies may not be limited to strengthening the dollar against foreign currencies, but will extend to deepening the state of uncertainty about the future of the global economy, which will leave gold facing factors with opposing effects.

For example, the International Monetary Fund warned in its Asia-Pacific Regional Economic Outlook report for November of the consequences of trade wars, which will lead to increased uncertainty and threaten the region’s ability to continue growing.

This may cause an acceleration in demand for safe havens in Asia, especially in China, and while house prices there continue to shrink, gold may find greater appeal. Let’s not forget that Asia, excluding the Middle East, accounts for 67% of global demand for gold bars and coins, according to the World Gold Council’s third-quarter figures.

Uncertainty about geopolitical factors may also be exacerbated by the lack of knowledge about Trump’s policies toward his opponents or allies. In the Middle East, Israeli Prime Minister Benjamin Netanyahu may be counting on Trump’s return to give him a free hand in the region and put more pressure on Iran, which may make achieving calm in the region further away than before.

This also comes amid Netanyahu’s strengthening of his bases for remaining in power, in which the far-right is increasingly dominant, by dismissing his defense minister yesterday and presenting an alternative who is likely not to oppose his hardline approach to ceasefire negotiations. In contrast, Trump has previously spoken of his intention to stop the war upon his return to power, which may conflict with Netanyahu’s interests, who is widely believed to be counting on the conflict to remain raging to strengthen his stay in power.

As for Ukraine, Trump has also previously spoken of his intention to stop the war there upon his return, while Ukrainian President Volodymyr Zelensky has said that this could be achieved by forcing Ukraine to negotiate by cutting off aid to it.

Trump’s previous talk of an intention to stop the raging wars may raise optimism, but I do not rule out that either Netanyahu or Zelensky will exacerbate the conflicts they are waging to drag the United States into those wars.

 

Zaid Barem / YMM