According to World Bank analysts, geopolitical turmoil once again affected the gold market. Therefore, safe haven demand has the potential to raise prices even further. Meanwhile, the conflict in the Middle East is prompting hedge funds to exit their short bets on the gold market, according to the latest report from the Commodity Futures Trading Commission. Additionally, some of them started taking new bullish positions.
Conflict in the Middle East will have significant impacts on the gold price
The World Bank published its latest commodity market outlook on Monday. The international financial institution predicts that average gold prices will increase by 6% in 2024. They also predict that the market will cool down in the following year. In this context, analysts make the following assessment in the report:
The conflict in the Middle East will lead to increased global uncertainty. Additionally, if the conflict escalates, it will have significant impacts on gold prices. Although the initial effects have been modest so far, the escalation of the conflict will further increase this uncertainty. This will lead to a decrease in risk appetite and a decrease in consumer and investor confidence.
This time might be different!
The World Bank’s bullish outlook for gold comes as analysts expect the ongoing conflict to broadly impact commodity markets, from energy to agriculture. Meanwhile, the geopolitical safe-haven demand for gold has never proven to be a consistent driver for the precious metals market. However, World Bank analysts note that this time could be different due to conflicts in the Middle East while Russia continues to invade Ukraine. Analysts explain their views as follows:
The continuation and escalation of one or both conflicts will turn up the heat on dual and compound shocks to commodity markets that could test the resilience of an already fragile global economy.
What does the divergence between gold prices and 10-year returns indicate?
The World Bank also includes in the report how much the new chaos affects gold prices. He notes that gold completed the third quarter with a 3% loss and fell to its lowest level in the last seven months. However, gold prices have risen more than 8% since the beginning of October.
Before the attack by Hamas that started the war on October 7, gold prices were under pressure due to the aggressive monetary policy of the Fed, which wants to maintain its restrictive monetary policy for the foreseeable future. The Fed’s hawkish stance brought the US dollar close to its highest level in the last year. It also increased bond yields to 5%, the highest level in the last 16 years. Analysts comment as follows:
The recent divergence between gold prices and yields on 10-year Treasury Inflation Protected Securities (TIPS) indicates that geopolitical risks and economic uncertainty outweigh the impact of higher interest rates on the carrying cost of holding gold.
Gold currently remains the preferred market
The Commodity Futures Trading Commission (CFTC) disaggregated Traders Commitments report for the week ending October 24 showed money managers increased their speculative gross long positions in Comex gold futures by 17,748 contracts to 122,456. At the same time, short positions decreased by 22,897 contracts to 66,708. The gold market is currently in a net uptrend of 55,748 contracts. During the survey period, ongoing short-covering helped gold rally to $2,000. Since then, safe haven demand has pushed gold prices towards this critical psychological level. Ole Hansen, head of commodity strategy, shares this assessment:
Gold currently remains the market of choice as bonds continue to sell off while bonds provide little protection. Over the last few days, we have seen some profit taking on the grounds that an attack on $2k would require additional consolidation. But it is clear that this is not the case. A close above would pave the way for an extension towards $2050.
Safe haven demand dominates the market
cryptokoin.comAs you follow from , the new bullish trend in the gold market comes even though markets expect the Fed to maintain restrictive interest rates through much of 2024. However, analysts say safe-haven demand continues to dominate the market. He also notes that it overshadows the risks of U.S. monetary policy. Commodity analysts at Société Générale also note a new focus on the precious metal, with $8.1 billion flowing into the gold market. Analysts also conclude that:
Otherwise, the usual macro factors (signs of a resilient economy in the US and the approach of the October 31-November 1st FOMC meeting) would cause gold to head south.
It depends on this for the gold price to maintain its gains!
Safe haven demand continues to support gold’s short selling movement. Some analysts say institutional investment demand for gold-backed exchange-traded products is difficult. He also notes that this trend must change if the market is to maintain its recent gains. Nicky Shiels, head of metals strategy at MKS PAMP, notes that many investors are still on the sidelines as the Fed maintains its hawkish monetary policy stance. In this regard, Shiels makes the following comment:
Gold prices may regain all-time highs in the medium term. And this is based on a convinced Fed pivot. For now, it has overextended in the short term while still remaining very sensitive to geopolitical headlines.
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