Gold Resumes Decline as US Midterm Elections and Sharp Swings in Oil Prices Sustain Investor Caution!

A 0.31% fall left spot gold in negative territory again on Tuesday, though above its intraday low, as pronounced swings in oil prices continued to shape trading. Gold had earlier found support for a recovery when oil briefly eased following unconfirmed reports of concessions between the United States and Iran concerning Iran’s nuclear programme and the release of frozen funds. Part of crude’s decline was subsequently reversed, with reports of a US strike on Iran’s Qeshm Island sending oil prices upwards.

The connection between oil and interest rate expectations has helped determine gold’s performance since the outbreak of the conflict in late February. The two commodities have frequently traded in opposite directions. Rising energy costs add to inflationary pressure, encouraging central banks, notably the Federal Reserve, to leave interest rates at elevated levels or tighten policy further.

A 25 basis point rate increase in September was followed by an October pause from the Fed. Its renewed commitment to price stability nevertheless left scope for additional rises, and the CME FedWatch Tool assigns a 75% probability to a December increase. Alongside uncertainty surrounding the Middle East and substantial fluctuations in oil prices, expectations of continued policy hawkishness at the Fed are sustaining the dollar, creating a further drag on gold.

Attention is turning to the US midterm elections and their potential consequences for the dollar, with implications for gold. In Commerzbank’s assessment, Republican losses of majorities in both the House of Representatives and the Senate could intensify pressure on the dollar by eroding the Trump administration’s overall political backing. Were the House alone to change hands, the currency would still encounter headwinds, albeit more modest ones. Retaining Republican control across both chambers, by comparison, would favour the dollar.

The course of events after the midterm elections will also matter considerably for the dollar. Another round of strikes accompanying a further escalation of the Iran conflict by Trump would raise energy prices over the short term and shift market appetite for risk. The resulting increase in risk aversion would favour the dollar as a safe haven, echoing its performance in the opening stages of the Iran conflict.

Market Analysis: Gold Faces $4,000 Resistance Ahead of Payrolls

As market positioning adjusts to changing expectations, Friday’s forthcoming nonfarm payrolls release will provide one of the key inputs into the Fed’s policy outlook. Robust employment readings would prompt a reduction in expected rate cuts and lift US Treasury yields, probably halting a gold recovery quickly. A move above $4,000 resistance, on the other hand, might require substantially weaker employment figures to bolster rate-cut expectations and undermine the dollar, giving gold sufficient support. Beyond the near term, ongoing purchases by central banks around the world and the gradual resumption of inflows into gold ETFs underpin prices. Such investment flows typically build slowly, however, making them unlikely catalysts for abrupt short-term market movements.