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Today’s market analysis on behalf of Dilin Wu Research Strategist at Pepperstone
Gold has recently surged past $2,750, maintaining its strength despite rising U.S. Treasury yields and a slight easing in geopolitical tensions. Remarkably, while the ten-year real interest rate in the U.S. has climbed from 1.5% in early October to around 1.98%, gold has still seen a significant increase of over $150 during the same period. This break from the traditional negative correlation between these assets indicates a significant shift in market dynamics.
Currently, the driving force behind gold’s ascent appears to be traders’ positive bets on a potential Trump victory, coupled with growing concerns over the escalating US debt crisis. The fiscal situation is alarming, with the deficit hitting $1.8 trillion for the fiscal year ending in September, accounting for around 6% of GDP.
While both candidates advocate for expansionary fiscal policies, if Trump wins and a “red wave” occurs, US debt could skyrocket by an additional $7.5 trillion over the next decade—more than double the $3.5 trillion increase proposed by Harris. This could significantly exacerbate the situation. The expected rise in deficit financing will likely result in a substantial increase in bond issuance, which, in turn, would drive yields lower.
Moreover, the Fed may be inclined to maintain low-interest rates to support economic growth while grappling with rising debt levels. This scenario reduces the opportunity cost of holding gold, making it increasingly attractive and further driving up its price.
In this context, under the “Trump trade”, the least resistance path for gold seems to be upward. The upcoming October US non-farm payroll report could further bolster bullish sentiment. Should employment growth fall below 100k due to hurricanes and strikes, and the unemployment rate rises to 4.2%, market pricing for a 25bp rate cut in December could intensify. In such a case, gold might very well reach the $2,800 mark.
Zaid Barem / YMM
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