A prolonged weakness in gold prices seems unlikely with long-term fundamentals remaining in favour of the yellow metal. 

Even as gold prices on COMEX have dropped 7% so far in November, experts believe the possibility of more interest rate cuts and higher inflation could boost demand for the precious metal. 

Nevertheless, gold has struggled since the outcome of the US presidential election last week as the dollar surged. 

A stronger dollar weighed on gold as it made the yellow metal more expensive for overseas buyers, thereby limiting demand. 

Carsten Fritsch, commodity analyst at Commerzbank AG, said:

The selling pressure was caused by a significantly stronger US dollar and a sharp rise in US bond yields.

However, hotter inflation could work in favour of gold prices in the medium to long term. 

In the weeks leading up to the election, the US dollar had already risen markedly in anticipation of a Trump victory. 

“However, this did not stop the gold price from rising to new record highs,” Fritsch said. 

“Apparently, market participants are acting after the election according to the principle of ‘buy the rumour, sell the fact’.”

Sticky inflation in the US

On Wednesday, the US consumer price index came in line with market expectations. The CPI index rose 2.6% in October on an annual basis and also increased 0.2% from September. 

Hotter inflation complicates the US Federal Reserve’s rate-cut cycle as it is one of the preferred gauges of the central bank to assess the economy and decide on monetary policy. 

An increase in inflation is usually good news for gold prices. “Due to the fact that inflation reduces the buying power of money and increases the demand for physical goods, many people consider gold to be a good inflation hedge,” Kitco.com said in a report. 

Moreover, President-elect Donald Trump is expected to increase tariffs on all imported goods and also employ tax cuts. This is expected to raise prices in the US and also accelerate the inflation rate. 

According to the CME FedWatch tool, traders have priced in a 62.4% probability of the US central bank trimming rates by 25 basis points in December. 

Fed Chair Powell more cautious

On Thursday, US Fed Chair Jerome Powell said at a Dallas event that with the economy still growing, the job market solid and the inflation rate above the 2% threshold, the bank has to be careful with more cuts. 

This weighed on market sentiments as the probability of Fed cutting rates by 25 bps in December slipped. 

But, experts believe that the incoming Trump administration could pursue the Fed to ease its monetary policy anyway. 

“If Trump were to additionally influence the Fed’s monetary policy and the latter were to fail to respond to higher inflation as required, the price of gold would rise significantly,” Commerzbank’s Fritsch said. 

Additionally, analysts at Kitco.com also believe that Trump could put pressure on the Fed to ease the monetary policies in order to bolster the economy. 

“Many anticipate that Trump would encourage the Federal Reserve to take a more dovish posture in order to bolster economic development, given his repeated statements expressing a desire for lower interest rates,” Kitco.com said in a report. 

Gold’s retracement an opportunity for investors

The US election results took the steam out of gold’s year-to-date rally last week. The World Gold Council (WGC) said in a note that the reaction was a “bit of a knee-jerk sting”. 

After Trump’s emphatic win, the continued strengthening of the dollar and Treasury yields, and a boost to cryptocurrencies along with risk-on sentiment in equities have weighed on the price of gold. 

“These factors might presage a welcome pause, even a healthy near-term retracement, for gold,” WGC said. 

Investors are likely to find purchasing opportunities during these uncertain times, especially if gold prices decline further. 

“The hedging function of gold is crucial due to ongoing inflationary pressures and geopolitical reasons; a change in Fed policy might revive a positive trend,” Kitco.com added. 

Trump’s policies to keep gold in demand

Experts said that Trump’s planned tax cuts are likely to lead to a significant increase in the budget deficit. 

This could cast doubt on creditworthiness of US public finances, Fritsch said. 

“This would benefit gold, which, unlike US government bonds, cannot be multiplied at will,” Fritsch added. 

“In this context, central banks in emerging economies are likely to seek to further increase the share of gold in their currency reserves, which would be accompanied by continued gold purchases.”

Commerzbank AG believes there is still the possibility of new record highs in gold prices. 

Meanwhile, WGC noted that even with current headwinds for gold, there is still fundamental support for prices. “And if it’s a retracement, we don’t expect it’ll develop into a rout,” the council said. 

According to WGC, gold’s recent downfall is a near-term phenomenon. 

It said that western investors, outside of futures, have not added much gold this year and so there is unlikely a slew of sellers in the wings. 

Moreover, equity markets were heavily concentrated and richly valued during the end of a business cycle, while geopolitical tensions remain elevated. These factors are expected to keep gold in demand in the longer term. 

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