Why Is Gold Falling Again as US Midterm Elections and Sharp Oil Price Swings Keep Investors Wary?

Volatility in oil prices put spot gold back under pressure on Tuesday, with the metal losing 0.31% on the day while holding above its intraday low. Unconfirmed reports earlier suggested concessions by the United States and Iran on Iran’s nuclear programme and the release of frozen funds. The brief decline in oil that followed helped gold stage a rebound. Crude subsequently recouped part of its losses, however, with reports of a US strike on Iran’s Qeshm Island driving oil prices higher.

Gold has frequently moved in the opposite direction to oil since the conflict began in late February, as the link between crude prices and interest rate expectations has become a major influence on the metal. By adding to inflationary pressures, higher energy costs prompt central banks, especially the Federal Reserve, to maintain elevated interest rates or tighten monetary policy further.

After increasing interest rates by 25 basis points in September, the Fed held rates steady in October. It nevertheless reaffirmed its commitment to price stability, keeping further increases on the table. According to the CME FedWatch Tool, the probability of a December rate hike stands at 75%. The dollar continues to draw support from Middle East uncertainty, volatile oil prices and expectations that the Fed will maintain a hawkish policy stance, placing additional downward pressure on gold.

The US midterm elections are the next focus for investors, as the outcome could affect the dollar and consequently gold prices. According to Commerzbank, a loss of Republican majorities in both the House of Representatives and the Senate could put greater downward pressure on the dollar by weakening the Trump administration’s overall political support. A change in control of the House alone would also create headwinds for the dollar, though the effect would be smaller. By contrast, Republican control of both chambers would be supportive of the currency.

The dollar’s direction will also depend significantly on developments after the midterm elections. A further escalation of the conflict with Iran by Trump, involving another round of strikes, would lift energy prices in the short term and alter market risk appetite. With risk aversion increasing in that environment, the dollar would draw support from its safe-haven status, much as it did during the initial stages of the Iran conflict.

Market Analysis: Can Gold Break Through $4,000?

With markets in a typical phase of adjusting positions as expectations shift, this Friday’s nonfarm payrolls report will be one of the key indicators shaping the Fed’s policy path. Strong employment figures would lead markets to pare back expectations of rate cuts and drive US Treasury yields higher, likely cutting short any rebound in gold. Only a significant weakening in employment data, by contrast, might give gold sufficient support to clear resistance at $4,000 by strengthening rate-cut expectations and weighing on the dollar. Longer-term price support continues to come from central bank gold purchases worldwide and the gradual return of inflows into gold ETFs. These investment flows, however, generally develop slowly and are unlikely to trigger sharp market moves in the short term.