Gold Turns Lower Again as US Midterm Elections and Sharp Oil Price Swings Keep Investors Cautious!

On Tuesday, spot gold returned to negative territory as sharp oil price swings continued to influence market movements, falling 0.31% on the day but remaining above its intraday low. Earlier, unconfirmed reports suggested that the United States and Iran had made concessions over Iran’s nuclear programme and the release of frozen funds. Oil prices briefly retreated, giving gold some support for a rebound. However, crude oil subsequently recovered some of its losses. Reports that the US had struck Iran’s Qeshm Island pushed oil prices higher.

Since the conflict broke out in late February, the relationship between oil prices and interest rate expectations has been a key driver of gold prices, with gold often moving in the opposite direction to oil. Higher energy costs intensify inflationary pressures, prompting central banks, particularly the Federal Reserve, to keep interest rates elevated or tighten monetary policy further.

The Fed raised interest rates by 25 basis points in September and paused in October, while reiterating its commitment to price stability, leaving room for further rate increases. The CME FedWatch Tool puts the probability of a December rate hike at 75%. Uncertainty in the Middle East, sharp oil price swings and expectations of a hawkish Fed policy stance continue to support the dollar, adding another source of downward pressure on gold.

Investors now face the US midterm elections, whose results could influence the dollar and, in turn, gold prices. Commerzbank said that if Republicans lose their majorities in both the House of Representatives and the Senate, the dollar could face greater downward pressure as the Trump administration’s overall political support weakens. Even if only control of the House changes hands, the dollar would still face some headwinds, although the impact would be more limited. Conversely, if Republicans retain control of both chambers, this would support the dollar.

Developments following the midterm elections will also have an important influence on the dollar. If Trump further escalates the conflict with Iran and launches another round of strikes, energy prices would rise in the short term, while market risk appetite would also shift. In such an environment of heightened risk aversion, the dollar would benefit from its safe-haven status, as it did in the early stages of the Iran conflict.

Market Analysis:

The nonfarm payrolls report due this Friday is one of the most important indicators informing the Fed’s policy path. Markets are currently in a typical period of positioning around shifting expectations. If employment data are strong, markets will scale back rate-cut expectations and push US Treasury yields higher, likely bringing any gold rebound to a swift end. Conversely, only if employment data weaken significantly, fuelling rate-cut expectations and weakening the dollar, might gold gain enough support to break through resistance at $4,000. Meanwhile, continued gold purchases by central banks worldwide and slowly returning inflows into gold ETFs provide long-term support for prices. However, these investment flows tend to move gradually and are unlikely to drive sharp short-term market moves.