Gold extends its bullish momentum

The gold market is currently experiencing a notable upswing, demonstrating significant bullish momentum. During the month of December, gold futures have been trading consistently above $2,000+ an ounce.

This upsurge in gold prices reflects a robust and steady climb from the previously established floor of around $1930. Its 6-month view is even stronger, at over 3.26%, and is up 11.96% year to date.

Speculators interested in CFD Gold trading, despite the inherent risks of leverage, should keep a close eye on the strong dollar.

The momentum behind this rise is particularly significant, given the potential for gold to hit new all-time highs, a scenario that seemed less likely only a few months ago. Gold’s all-time high of $2,297 occurred in the summer of 2020, where the market was particularly funky.

Factors Influencing the Bullish Momentum

The recent bull market is down to a few factors, with economic indicators playing a big role. Preliminary indicators, for instance, suggest a contraction within the U.S. manufacturing sector and a neutral trend in the service sector. These developments may be decreasing investor confidence due to a slowing economy, which can lead them to seek safer, evergreen assets like gold.

The trajectory of gold prices in recent weeks has had some notable fluctuations, yet an undercurrent of market optimism persists. After a temporary dip to $1,965, gold rebounded, crossing the significant threshold of $2,000 per ounce on multiple occasions.

David Morrison, a senior market analyst at Trade Nation, highlighted gold’s commendable performance, especially in the context of these fluctuations. Morrison’s observations reflect a broader market sentiment that, despite short-term volatility, the outlook for gold remains positive​.

Influence of U.S. Monetary Policy on Gold Prices

In recent months, the global economic landscape significantly impacted gold prices, with Federal Reserve Governor Christopher Waller’s insights playing a key role. Waller indicates a shift towards lower inflation, with October data showing a gradual easing in economic activity.

There is a notorious relationship between the US dollar and gold, where they typically have a negative correlation. This may then pose a confusion over why gold is bullish, considering the US dollar has been so strong in 2023. However, recent trading activity somewhat stems from speculators betting on a change in monetary policy

In other words, the market is expecting an end to interest rate hikes, which could end up with a weaker dollar. Typically, this is favorable for gold, and silver has reacted well to this, too.

Gold is often seen as a hedge against inflation and currency devaluation, making its price sensitive to interest rate decisions. High interest rates make the opportunity cost of holding gold higher, meaning that gold, which is notoriously stead, demand more gains to be worthwhile. Low rates, on the other hand, means there’s a low opportunity cost of holding gold.

Market expectations reflect these economic trends, with a high likelihood of the Federal Open Market Committee (FOMC) holding rates in December and increasing chances of rate cuts in the following year. Consequently, gold prices have shown a positive response to these developments, highlighting its role as a safe-haven asset in times of economic uncertainties​.

This environment of a cooling economy and moderating inflation, coupled with potential shifts in monetary policy, fosters the recent rise in gold prices, reaffirming its appeal as a stable investment amidst global economic fluctuations.

Global Economic Perspectives and Gold Demand

The global economic outlook presents a mix of headwinds and tailwinds for gold. Economic consensus points towards weaker global growth, resembling a short, possibly localized recession. This environment, combined with falling yet elevated inflation and the end of rate hikes in most developed markets, has implications for gold demand​​. 

Fitch Solutions’ forecast suggests that gold prices might fall beyond 2023, contingent on the resolution of the Russia-Ukraine conflict and a rebound in the global economy in the latter half of the decade. However, risks such as China-US trade wars and anti-Russian sanctions could elevate costs of goods and fuel rapid growth in gold prices​​.

However, instability is likely to resume in 2024, and where there’s instability, there’s often an appetite towards safe commodities. The global economy is likely to fare worse than the US, and given that US sentiment is positive on gold, it’s very possible that global sentiment will be too – particularly with the USD likely to weaken from anticipated rate drops.

From every metric – 5-day, 1 month, 6 months, year to date, 1-year, and 5-years – gold is gaining. This has been somewhat surprising in a time when the USD is strong – but that could soon end if speculators are right about interest rates falling. The US economy also appears to be slowing, and the wider global economy continues to suffer with inflation. As a result, safe haven assets like gold are in-demand. However, when speculators play such a big role in trading volume, it’s difficult to predict future prices, as there are some indicators, like geopolitical conflicts, that could swing gold the other way.

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