- Gold prices rose as investors turned to safe havens amid rising geopolitical risks.
- US bond yields fell and the dollar weakened, contributing to the rise in gold prices.
- Sentiment soured following President Putin's approval of the nuclear doctrine and mixed signals from Russian officials.
Gold prices have recorded positive daily gains, rising by about 0.70% on Tuesday due to risk aversion due to escalating tensions in the Russia-Ukraine conflict. Market participants seeking safety have flocked to the golden metal, which has rallied above $2,600 after falling to a two-month low of $2,536.
At the time of writing, XAU/USD is trading at $2,629. Amid weak economic data, falling US bond yields and a weaker US dollar boosted gold prices. However, the precious metal rose on geopolitical risks following Russia's large-scale attack on Ukraine, as US President Joe Biden approved the use of US-made long-range missiles in Russia.
According to TASS, Russian President Vladimir Putin approved the nuclear theory in retaliation. This triggered a risk-off sentiment, causing global stocks to fall while greenbacks and gold rose.
Recently, Russian Foreign Minister Lavrov said that Russia believes that a nuclear war will not occur.
Separately, the U.S. economic schedule revealed that October's U.S. housing data was off the mark, and Kansas City Fed President Jeffrey Schmidt's comments were off the mark.
Schmitt said it remains unclear how far interest rates will need to be cut, but he is encouraged that the decision comes amid growing confidence that the Fed is on track to meet its 2% target.
The Fed is expected to lower borrowing costs for the third consecutive time at its December meeting. Nevertheless, recent data has witnessed investors lowering the probability of an impending 25 basis points (bps) rate cut from 62% to 58%, according to data from the CME FedWatch tool.
Ahead of this week, the U.S. economic schedule will include new jobless claims, S&P Global PMI, and the University of Michigan's (UoM) final consumer confidence figures for November.
Gold shines despite strong US dollar
- Gold prices rebounded as real yields in the United States, which are inversely correlated with gold bullion, fell three basis points to 2.05%.
- The US Dollar Index (DXY), which tracks the performance of the US dollar against a basket of six currencies, was flat at 106.17.
- Market players continue to digest Donald Trump's victory in the US presidential election amid concerns that tariffs and tax cuts are a potential inflation booster and could delay the Fed's easing cycle. .
- U.S. Treasury yields also came under pressure ahead of the weekend, with the 10-year benchmark rate dropping 2 basis points to 4.39%.
- U.S. building permits in October improved compared to September, but decreased -0.6% from 1.425 million to 1.416 million.
- Housing starts during the same period fell for the third consecutive month, shrinking by 3.1% from 1.353 million to 1.311 million.
- Investors are pricing in a 24 basis point rate cut by the Federal Reserve by the end of 2024, according to data released by the Chicago Commodity Exchange Commission through the December Federal Funds Futures contract.
- On Monday, US President Joe Biden authorized Ukraine to use long-range missiles inside Russia, CNN revealed. The decision was made in response to thousands of North Korean troops being sent to support Moscow's war effort.
Gold price recovers as buyers target 50-day SMA
The upward trend in gold prices continues, with buyers gaining momentum as gold approaches its 50-day simple moving average (SMA) of $2,655. If there is further strength, XAU/USD could move higher and challenge the November 7th high of $2,710, and then the psychological level of $2,750.
Conversely, if gold falls below the 100-day simple moving average (SMA) of $2,550, sellers could target the November 14 swing low of $2,536. Once cleared, the next stop for XAU/USD will be at $2,500.
The Relative Strength Index (RSI) remains bearish but is approaching the neutral line, indicating that gold buyers are gathering short-term momentum.
Frequently asked questions about risk sentiment
In the world of financial terminology, two terms are widely used: “risk-on” and “risk-off” to refer to the level of risk an investor is willing to accept during a given period of time. In a “risk-on” market, investors are optimistic about the future and are more willing to buy risky assets. In a “risk-off” market, investors begin to “play it safe” out of fear for the future, so they buy low-risk assets that are guaranteed to yield a return, even if it is a relatively small amount.
Typically, during “risk-on” periods, the stock market rises, and so do the values of most commodities, except gold. This is to benefit from positive growth prospects. The currency of a country that is a large exporter of primary products will appreciate due to increased demand, and the virtual currency will appreciate. In a “risk-off” market, bonds, especially major government bonds, rise, gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc, and US dollar all profit.
Minor currencies such as the Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD), ruble (RUB) and South African rand (ZAR) all tend to rise in “riskier” markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodity prices tend to rise during risk-on periods. High economic activity This is because investors are anticipating an increase in demand for raw materials in the future.
The major currencies that tend to appreciate during “risk-off” periods are the US dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF). The U.S. dollar is the world's reserve currency, because investors buy U.S. government bonds in times of crisis, and is considered safe because the world's largest economy is unlikely to default. The yen is due to increased demand for Japanese government bonds, and since a high percentage of the value is held by domestic investors, there is little chance of a fire sale of government bonds even in times of crisis. The Swiss Franc is a strong currency because Switzerland's strict banking laws provide investors with greater capital protection.
