Gold Prices Are Back on the Upside Trajectory

Gold prices are up 4.0% this week, reaching $2,667 per troy ounce, marking their strongest weekly gain since late March. This rally has nearly erased the previous week’s record decline of 4.3%, a move not seen in the past three years. The earlier drop in gold was largely driven by hawkish comments from Federal Reserve Chair Jerome Powell, following an uptick in U.S. inflation data for October. Headline inflation rose to 2.6% YoY, while producer prices increased to 2.4% YoY, prompting Powell to state that there is no urgency to cut interest rates. This stance pushed U.S. 10-year Treasury yields to 4.50%, their highest since late May, creating headwinds for non-yielding assets like gold.

However, geopolitical factors have shifted market sentiment, supporting the recovery in gold prices. Hopes of de-escalation following President-elect Donald Trump’s inauguration were overshadowed by the acting U.S. administration’s authorization for Ukraine to strike Russian territory using U.S.-made long-range ATACMS missiles. In response, Russia revised its nuclear doctrine to permit nuclear retaliation for such attacks, further escalating tensions. Although a nuclear response is considered unlikely, experts suggest that Ukrainian defenses in Donbass could collapse if Russian advances continue, indicating that the conflict may intensify before peace efforts gain traction.

Large investors have also begun restoring their positions in gold. After two weeks of significant outflows totaling $1.57 billion, the SPDR Gold Trust (GLD) recorded $190.7 million in net inflows this week. Goldman Sachs reaffirmed its price target of $3,000 per ounce by 2025, noting the potential for brief pullbacks to $2,500, which could offer attractive buying opportunities.

Technically, gold prices appear poised for further gains. The two-week pullback has alleviated overbought conditions, and a return above $2,770 per ounce by mid-December would be critical to sustain the bullish momentum. If achieved, prices could climb toward new highs of $2,860-$2,880 per ounce. While the Federal Reserve’s stance remains a potential headwind, escalating geopolitical tensions and renewed investor interest are likely to drive gold prices higher, particularly if the Fed begins cutting rates in 2024.