Gold soared on Wednesday after Democrats swept the US midterm elections, raising uncertainty over President Donald Trump’s fiscal agenda.
Spot gold prices rose as much as 3% to US$4,050 ($5,762.66) an ounce, placing the precious metal on track for its largest daily gain since August.
US Department of Treasury yields fell across the curve, while the dollar index dropped as much as 0.6%, its biggest decline in two months.
The moves followed Democrats’ victory in both chambers of Congress, an outcome investors see as likely to hamper further government borrowing and spending.
Capital Economics Senior Climate and Commodities Economist Hamad Hussain tells Reuters: “The elections appear to have boosted gold prices as investors become more worried about the fiscal outlook.”
Months-long slump
Wednesday’s rally marked one of gold’s strongest rebounds after months of selling pressure driven by rising interest rate expectations.
The precious metal has struggled this year as surging energy prices caused by the US-Iran war fuelled inflation concerns, prompting expectations of tighter monetary policy and pushing the dollar and bond yields higher.
Since the conflict escalated in late February, gold has lost about 25% of its value, hitting its lowest level in a year last week.
Meanwhile, prospects for a peace agreement between the US and Iran remain distant, according to a senior Iranian official cited by Reuters.
Recovery ‘limited’ by inflation
Despite Wednesday’s gains, Hussain warns that gold’s scope for recovery could be limited by persistent inflation and expectations that the US Federal Reserve will raise interest rates further.
He also points out that gold has “increasingly become positively correlated with equities”, so continued weakness in tech stocks could also weigh on prices.
Investors are now awaiting this week’s US payrolls report for further clues on the Federal Reserve’s next policy move.
Markets are currently pricing in a more than 80% chance of another interest rate increase in December, which could continue to weigh on gold’s near-term outlook.
Write to Jackson Chen at Mining.com.au
Main Image: US House of Representatives
