• Gold outperforms other asset classes; provides protection against risk events
• Tailwinds could persist as Q4 agenda includes US election, Fed policy, and geopolitical risks
• Technical outlook remains positive; another bull run could commence

Previously in Q3

It’s a golden age for gold which has been exhibiting an unprecedented performance so far this year, adding another 14% to its value in the third quarter despite global central bank reserves stabilizing, to trade up by 42% year-on-year. That’s even higher than the 32% annual return in the S&P 500.

Fed rate cuts, recession risks in Q4

The final quarter of the year is already underway, and it could be volatile as investors are still missing answers on a couple of topics.

The rate cut story might be a key catalyst for the gold rally. It only took an upbeat jobs report to cast doubt on future rate cut expectations. Investors completely gave up hope for additional 50bps reductions after employment growth rose to a six-month high, the unemployment rate dropped to 4.1% and wage growth accelerated. In addition, they even started to doubt the need for further reductions at the next meeting. Treasury yields surged above 4.0%, a level not seen since July, while gold pulled back only moderately due to the simultaneous escalation of rocket attacks between Israel and Iran.

The services side of the US economy behaves like interest rates are still accommodative. Nevertheless, it is worth mentioning that the unemployment rate is a lagging indicator that confirms changes rather than predicting them. Hence, the improvement in the jobs data should not be taken in earnest. Besides, Thursday’s negative reaction to the latest weekly jobless claims suggested that investors are not convinced that the labor market is on full steam.

All in all, there are still some signs of economic softness which cannot be ignored, including the rising delinquency rates in credit cards and mortgage loans, the contracting ISM manufacturing PMI numbers, and the inverted curve between 3-month and 10-year bond yields, which is not always a reliable indicator but it’s been typically inverted between six months and two years before a recession started. Note that the inversion has been holding for more than a year so far.

Should inflation resume its downtrend, and the labor market starts to show cracks, prompting more rate reductions in the coming months, gold could receive fresh buying interest. Otherwise, a rebound in inflation accompanied by a resilient labor market may delay further rate cuts. 

US federal election

The US federal election will be the next hot topic in global markets. Note that the scenario of a second Trump term is not fully priced in yet, with polls showing a marginal advantage of 2-3% for Kamala Harris, which could be easily reversed.

Trump’s presidency could prove inflationary if republicans deliver their promised huge corporate tax reductions through Congress. As global competition for AI heats up, a restrictive stance against China could harm Wall Street, leading traders to seek safety in assets like gold. In this case, bitcoin might restore its connection with the precious metal given Trump’s support to the crypto market.

On the other hand, Harris has little experience with foreign affairs and comes from the pro-trade region of California, creating speculation that she may prevent US-China relations from blowing up. It’s evident that she desires the US to have the leading role in the 21st century and could potentially join the tough-on-China campaign, albeit with a more balanced Biden-like strategy, which may have minimal impact on precious metals.

Geopolitical risk

The geopolitical noise in the Middle East could remain a hot topic in Q4. Israel has provided little information about its retaliation against Iran’s latest massive missile attack, saying that the response “will be lethal, precise and surprising”. 

It seems that Hezbollah is in favor of a ceasefire agreement without making it contingent on ending the war in Gaza, but Netanyahu’s unwavering use of force gives little assurance that a deal will be reached soon. Therefore, as long as the tit-for-tat violence continues, things could still go worse even though an attack against Iran’s oil facilities has been put on the sidelines for now and perhaps until the next US president is elected. 

Gold’s technical outlook

From a technical perspective, gold’s upward trajectory seems to be well following a bullish 1-5 Elliot wave pattern. The latest pullback in the price could be the wave 4. If the price slips below the $2,600 region, the decline could expand towards the crucial support area of $2,530-$2,550 before the final wave 5 starts.

Alternatively, a bounce back above the 20-day simple moving average (SMA) and the $2,635 area could initially see a test near $2,652. Even higher, the price might print a new record high around $2,700. Then, the door could open for the $2,800-$2,843 area.