Fed cuts and election uncertainty lift Gold – will it spark a lasting rally?

As gold prices hold steady, market dynamics suggest the yellow metal could continue to attract safe-haven demand amid heightened U.S. election risks and ongoing geopolitical tensions in the Middle East. With the Federal Reserve’s expected rate cut later this week and uncertainty around the election outcome, gold is positioned as an attractive asset for investors seeking stability in volatile times.

U.S. election and geopolitical tensions bolster gold’s appeal

The U.S. presidential election remains neck-and-neck, adding significant uncertainty to financial markets. A delayed or contested result could amplify volatility, potentially driving more investors toward safe-haven assets like gold. Meanwhile, escalating tensions in the Middle East further enhance gold’s appeal as a defensive asset. Gold traditionally benefits from such periods of geopolitical stress, as it offers a hedge against sudden market shifts and economic disruption.

Tim Waterer, chief market analyst at KCM Trade, noted that political and economic uncertainties this week could support gold prices. “Delays in the election outcome or a split control of the House and Senate might drive safe-haven flows,” he explained. In this context, the precious metal is well-positioned to attract inflows from risk-averse investors, especially given the current softness in the U.S. dollar, which makes gold more affordable for foreign currency holders.

Fed’s expected rate cut and the dollar’s influence on gold

The Federal Reserve’s highly likely upcoming 25-basis-point rate cut, following September’s half-point reduction, is expected to bolster gold’s appeal as the benchmark rate moves to around 4.6%. Recent inflation stabilisation and election uncertainty have shifted market expectations toward a moderate cut, with the CME FedWatch tool showing a nearly 100% probability of this move.

As rates approach a neutral level, the Fed funds rate ceiling remains a key boundary, signalling that while further cuts are possible, aggressive reductions below neutral are unlikely without significant economic shifts. 

Source: Macrobond IG 

This measured approach supports gold’s safe-haven status but may face resistance from renewed interest in the U.S. dollar and rising bond yields, which can draw investors toward higher-yielding assets and cap gold’s near-term upside.

Gold’s performance in a low-interest environment

Despite these headwinds, the Fed’s continued rate cuts create a favourable backdrop for gold. Low interest rates reduce the opportunity cost of holding non-yielding assets like gold, enhancing its attractiveness, especially during times of economic uncertainty. 

The Fed’s ongoing “recalibration” to a lower inflation environment allows for rate adjustments without worrying about runaway inflation. With inflation dropping to 2.4% from last year’s 9.1% high, restrictive interest rates are seen as unnecessary, enabling the Fed to proceed with gradual cuts.

Powell’s remarks following the Fed’s rate decision on Thursday will likely offer additional insights into the central bank’s approach. For now, economists expect more cuts in December and possibly next year, supporting gold’s longer-term prospects in a low-rate environment.

Global demand for Gold and China’s influence

Gold demand could also receive a boost from economic developments in China, one of the world’s largest consumers of metals. This week, the Standing Committee of China’s National People’s Congress is expected to approve additional fiscal stimulus measures to support economic growth. As China stabilises its economy, demand for metals like gold may rise, providing further support for prices. Additionally, with the dollar under pressure and Chinese stimulus potentially lifting commodity demand, gold could see stronger support in the international market.

Balancing factors: Higher bond yields and the U.S. dollar

Despite gold’s positive outlook, renewed demand for the U.S. dollar and elevated bond yields may temper its gains. Higher yields can divert investor interest from non-yielding assets like gold, especially as bond yields rise in response to Fed policy adjustments. Nonetheless, with the dollar hovering near a two-week low, some of gold’s downside may be offset by its appeal to non-dollar investors.

Waterer highlighted this nuanced relationship, noting, “The U.S. dollar has lost some traction to start the week, which has left the door open for gold to grind higher.” As election uncertainty looms, the dollar’s performance will be closely monitored, as it remains a key determinant of gold’s value relative to other currencies.

Technical analysis: Gold remains solid despite uncertainty

Looking ahead, gold’s outlook remains promising. With potential fiscal stimulus from China, continued Fed rate cuts, and enduring election uncertainties, the precious metal stands resilient as a hedge against market volatility and economic shifts. For investors, gold’s safe-haven status, coupled with the low-interest environment, makes it a strong candidate for portfolio diversification in the current global landscape.

Gold is holding at around $2740 at the time of writing. Despite a recent drawdown, bullish sentiment still remains as prices remain elevated above the 100-day moving average. The bullish narrative is also supported by prices being close to the lower Bollinger band, hinting at possible oversold conditions. 

Buyers could find pushback at the $2754 price level, with a further push likely to hold at the upper Bollinger band. Sellers on the other hand, could find support at the $2720 and $2704 price levels.

Source: Deriv MT5

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