Gold (XAU/USD) saw a decline on Monday, mirroring the broader commodity market, which is grappling with fears of global economic slowdown following disappointing US employment data last week.
The dip in Gold prices is also influenced by rising US Treasury bond yields. This rise stems from increasing speculation that former President Donald Trump could win the upcoming presidential election in November. Analysts predict that Trump’s potential tax cuts combined with sustained spending could lead to higher inflation and interest rates, negatively impacting Gold, a non-interest-bearing asset.
Additionally, profit-taking by short-term traders after a 1.45% gain on Friday is contributing to the decline.
Gold’s Price Hit by Bond Market Dynamics
Gold traded in the $2,370s on Monday, retreating from Friday’s peak of $2,393, which followed the release of US NonFarm Payrolls (NFP) data. Despite the weaker US labor market data from the NFP report, which bolstered expectations that the Federal Reserve might cut interest rates sooner than expected—a typically positive factor for Gold—prices have been pressured by the so-called “Trump-put” on the bond markets.
With doubts surrounding President Joe Biden’s ability to continue in office and no clear successor in sight, Trump is increasingly seen as the leading candidate for the next presidential term. Known for his tax-cutting and deficit-spending policies, Trump’s approach is anticipated to sustain high inflation, leading to increased interest rates. This has negatively impacted US Treasury bonds, pushing up yields, which typically have an inverse relationship with Gold prices. Additionally, the US Dollar’s strength, buoyed by these political and economic outlooks, has further pressured Gold, which is primarily traded in USD.
Geopolitical and Macro Factors Supporting Gold
Despite these pressures, Gold continues to find support from several geopolitical and macroeconomic factors. Ongoing conflicts in the Middle East and Ukraine are prompting investors to seek the safety of Gold.
The BRICS intergovernmental organization’s efforts to reduce global trade dependency on the US Dollar are also bolstering the longer-term outlook for Gold, positioning it as a viable alternative to the Dollar. These initiatives arise from the perception that the US has weaponized its currency against adversary states, and a less dominant Dollar would diminish the impact of US-led sanctions.
Additionally, high demand from central banks, which account for roughly a quarter of the Gold market, remains a significant support. In response to the unexpected strengthening of the US Dollar in the first quarter of 2024, Asian central banks have increased their Gold reserves as a hedge against potential depreciation of their own currencies relative to the USD.
In summary, while immediate pressures from economic data and political developments are weighing on Gold prices, its role as a safe-haven asset continues to be reinforced by ongoing geopolitical tensions and strategic moves to diversify away from the US Dollar.
