Gold rallies on haven demand due to greater geopolitical risk
LONDON (November 29) Gold (XAU/USD) stages a bigger rebound on Friday and enters the $2,660s during the European session. A rise in safe-haven flows due to a breakdown in the Israel – Hezbollah ceasefire agreement is one of the catalysts, as is Russian President Vladimir Putin’s warning Russia could launch nuclear-capable missiles at Ukraine.
Gold rallies as safe-haven demand increases
Gold experienced a drop in price of nearly 3.0% Monday on rumors Israel and Hezbollah were close to reaching a ceasefire agreement. An eventual deal emerged with both sides agreeing to a 60-day cessation of hostilities.
Gold is rebounding on Friday, however, after the ceasefire fell apart following a strike by the Israeli airforce on Hezbollah targets in southern Lebanon, who they claim were violating the ceasefire agreement.
Geopolitical risks have further ratcheted up in Ukraine after Russia left over a million inhabitants without electricity following widespread strikes on Wednesday night.
While speaking at a conference in Kazakhstan on Thursday, Putin said “he would consider further launches of Russia’s new Oreshnik medium-range ballistic missile, first fired at Ukraine’s Dnipro region last week,” according to CNN. Oreshnik’s have nuclear capability.
Gold supported by reduced risks of a US-Mexico trade war
Diminishing tariff fears could also be impacting Gold price after reports that US President-elect Donald Trump and Mexican President Claudia Sheinbaum had a constructive phone conversation on Wednesday. This suggests a lower risk of a costly trade war between the two countries.
The implementation of higher tariffs had been viewed as inflationary for the US and expected to keep interest rates elevated. This, in turn, would be negative for non-interest-paying assets like Gold. However, now many commentators are saying that Trump’s threat to put a 25% tariff on Mexican imports is probably more a negotiating tactic than anything else and, therefore, unlikely to materialize.
US Dollar edges lower, aiding Gold
A further factor supporting Gold on Friday is a weaker US Dollar (USD). The Dollar Index (DXY), which measures its value against a trade-weighted index of peers, has edged down during trading on Friday. This is positive for Gold, which is mainly priced and traded in USD.
Gold’s recovery on Thursday was partly spurred by increased bets the Fed would cut interest rates by 25 basis points (bps) at its December meeting, and whilst the expectations remain about the same, odds have not further increased as we draw to the end of the week.
The market-based probability of a rate hike is 66%, according to the CME FedWatch tool. This leaves a 34% chance the Fed will leave interest rates unchanged.
FXStreet
