US election: Gold prices drops more – time to buy or sell?

Dubai: Gold prices are seen going back and forth in the coming days, even as more clarity surfaces surrounding the top US economy and its governance. But analysts remain optimistic that any fluctuation will be short-lived and prices will continue to move higher in the months ahead.

Gold prices worldwide have consistently risen every day of the week so far, but was declining on Wednesday, mirroring the price of the yellow metal on global markets. Even if prices move lower surrounding the wider uncertainty currently prevailing, it won’t be for long.

However, the good news for those invested and maybe looking to sell – but bad for those looking to buy now – is that gold prices are still up about 25 per cent so far this year despite trading in a narrow range over past few weeks.

What’s primarily driving prices now?

In the previous session, gold had logged gains of over 1 per cent. In global markets, gold prices today moved lower by a similar margin amid a stronger US dollar.

The US dollar likewise reversed early losses and climbed 0.45 per cent against a basket of currencies to 94.071. The greenback strengthened after early results showed the outcome of the US presidential election could be closer than polls had suggested. Gold was at $1,890 (Dh6,941) an ounce, down 1 per cent.

The US dollar has been weak for most of Donald Trump's presidency. Tax cuts, a bigger deficit and several interest rate cuts from the US Federal Reserve have pushed the greenback lower. But even if Trump loses to Joe Biden, the dollar may not dramatically rebound anytime soon.

Among other precious metals silver fell 0.2 per cent to $24.11 (Dh88.56) per ounce. Platinum dropped 0.5 per cent to $861.90 (Dh3,165.76) and palladium fell 1.1 per cent to $2,256.88 (Dh8,289.52).

How will gold prices react to the elections?

According to some analysts, contested elections should increase the geopolitical uncertainty and boost the safe-haven demand for gold. On the other hand, some analysts also believe that the contested elections would put downward pressure on the stock market, dragging gold down in the process.

Another reality that is worth noting is that contested elections would undoubtedly delay the monetary stimulus package for the world’s largest economy, which should be negative for gold prices and it’s also true that recently, gold has been moving in tandem with the stock prices, in response to stimulus hopes.

But, in times of stress, levels which are largely expected to be high this election given the surrounding conditions or backdrop – irrespective of the result, gold could decouple from equities and behave more like a safe haven asset. However, when analysts look at trends beyond this week, prices are seen up.

What it means for gold investors and buyers?

What does all the above mean for the gold investors? Most forward-looking analysts say they should look past the elections already, citing the historic example of the 2016 presidential election; the price of gold declined in the aftermath of Trump’s victory, but the downward trend was eventually reversed.

So, yes, while trend watchers caution that all should be prepared for elevated volatility in prices this week, one should keep in mind gold’s responses to geopolitical events are relatively short-lived. In the long run, what drives gold prices are a set of underlying fundamental factors, which stays positive for the yellow metal.

One key fundamental factor being the US Fed is expected to maintain its policy of nominal interest rates for years, while inflation will accelerate at some point, possibly when the economic recovery sets in for certain. This means that the real interest rates (adjusted for inflation) should remain very low or even decrease further, supporting the gold prices in the process.

Apart from US election results, gold investors are also awaiting the outcome of Federal Reserve and Bank of England meetings this week – potential events that could trigger a price change – although, currently, analysts don’t view the meetings as a major catalyst.