Gold prices fell nearly 5% since election day last week, before recovering by around 1% over the past couple of days. This sudden decline in gold prices is a part of a larger 10% decline in prices from the peak levels of Q3. The volatility in gold prices can largely be attributed to fluctuations in the investment demand for gold.
Gold is considered a safe-haven asset from an investment point of view. Investments in the yellow metal are usually made to hedge against macroeconomic uncertainty. Moreover, since gold as an investment only offers capital gains, an increase in interest rates tends to lower the demand for gold and shifts investors to interest-linked securities. Gold prices rose sharply in the third quarter, driven by macroeconomic uncertainty caused by the unexpected outcome of the UK’s June 23 EU referendum and concerns over global economic growth. London PM Fix gold prices averaged roughly $1,335 per ounce in the third quarter, around 23% higher since the start of the year. The rise in prices was largely driven by an increase in demand from gold ETFs, which were net buyers of 725 tons of gold in the first nine months of 2016, as opposed to the corresponding period of 2015 in which these funds were net sellers to the tune of 61 tons. However, the gold pricing environment has changed considerably since then.
Expectations of an interest rate hike by the Fed have risen amid a strengthening U.S. job market. October jobs data represented the seventy-third consecutive month of job gains, with the unemployment rate standing at 4.9%. This has strengthened the case for a rate hike, a notion confirmed by the latest Federal Reserve Open Markets Committee meeting press release. Rising expectations of a rate hike resulted in a decline in gold prices in October, with prices averaging $1,267 per ounce last month. Adding to the impact of rising rate hike expectations, last week’s elections further dampened gold prices. President-elect Trump’s pro-business policies have buoyed the equity markets, driving investors away from gold. Several of the President-elect’s campaign promises such as lowering corporate tax rates and regulatory regulation and a $550 billion infrastructure spending plan have been well received by markets. With buoyant equities taking the sheen of gold prices, the outlook for the rest of the year remains rather subdued. A widely expected interest rate hike in December and a potential boost to economic growth with a change in White House administration in January, is likely to limit the upside for gold prices in the near term.