Gold's Future After the US Election: Why It May Continue to Fall

In the past year, gold has seen a significant price increase of over 30%, driven by a combination of global economic and political factors. A sharp half-point interest rate cut by the Federal Reserve spurred initial momentum, with geopolitical tensions and uncertainties surrounding the upcoming US presidential election adding further fuel to the surge. Additionally, central banks in key economies like China, India, and Turkey have ramped up their gold purchases, strategically shifting away from US dollar dependence.

Current gold market landscape

Gold rose over 30% in 2024

In times of global financial instability, gold traditionally stands out as a safe-haven asset, drawing increased demand as investors seek security. Geopolitical tensions, currency fluctuations, and slowing GDP growth often correlate with rising gold prices as it becomes a hedge against uncertainty.

This role of gold has been particularly evident during recent events, with heightened geopolitical tensions and macroeconomic issues fueling its appeal.

Emerging economies in Asia and Eastern Europe have been boosting gold reserves to reduce US dollar dependence and enhance stability. Lower interest rates also support gold demand by lowering the opportunity cost of holding non-yielding assets. Central banks in China, Russia, and Turkey have notably increased their purchases, adding to global demand.

Geopolitical tensions, such as the Russia-Ukraine conflict, Middle Eastern unrest, and China’s stance on Taiwan, have further fueled gold prices, solidifying its status as a safe-haven asset.

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Overvaluation signs

Impact of US elections on gold prices.

The outcome of the 2024 US presidential election, with Donald Trump securing the presidency, is poised to influence gold prices significantly.
President-elect Trump's commitment to ending ongoing conflicts, as emphasized during his campaign, suggests a potential shift toward global stability. His administration's focus on negotiating peace deals and de-escalating international tensions could reduce the geopolitical risks that have recently driven investors toward gold.

For instance, Trump's plans to reassess security alliances and negotiate an end to the Ukraine war indicate a move toward a more stable global environment.
While his focus on reducing conflicts may ease geopolitical risk, his protectionist measures raise concerns about economic tensions, especially with China. Trump has reiterated his intention to impose 100% duties on goods from countries moving away from the US dollar, which could strengthen the dollar and fuel inflation.

A stronger dollar, coupled with rising inflation, would likely prompt rate hikes. These rate increases could weaken gold, as higher interest rates generally reduce the appeal of assets like gold. As such, while Trump's policies may bolster the dollar, they could also create conditions that put downward pressure on gold prices.

China’s reduced gold purchases

China's decline in gold imports. Source: Bloomberg

China, historically a significant driver of global gold demand, . In the first nine months of 2024, gold consumption in China decreased by 11.2% year-over-year, according to the China Gold Association. This trend intensified in the third quarter, with demand plunging over 22% amid record-high prices and a sluggish economy.
Several factors contribute to this downturn:

• Record-High Prices: Elevated gold prices have deterred consumers, particularly in the jewelry sector, leading to reduced purchases.
• Economic Slowdown: China's economy faces slowed growth, weak consumer demand, real estate struggles, declining manufacturing, and limited impact from government stimulus efforts, further suppressing demand.
• Policy Shifts: Government measures aimed at stabilizing the economy may have affected gold consumption patterns. Investments declined due to the strength of competing assets; in particular, Chinese equities rose due to the recent announcement of aggressive economic stimulus.

This reduction in demand from the world's largest gold consumer is likely to exert downward pressure on global gold prices. As China's appetite for gold diminishes, the market may experience a surplus, potentially leading to price corrections.

Russia’s economic strain and gold reserves

Leading buyers of gold by country. Source: World Gold Council

Russia holds approximately 8.1% of the world’s gold reserves, ranking fifth globally in terms of gold holdings. Over recent years, gold has formed a significant part of Russia’s National Wealth Fund (NWF), which has served as a financial cushion during times of economic strain.

However, with the ongoing war and mounting expenses, this reserve is under pressure. Recent reports indicate that the liquid assets of Russia's NWF have nearly halved, largely due to the dual impact of war-related expenses and sanctions imposed by Western countries.

Liquid assets in the NWF of Russia

Given that a substantial part of the NWF is inaccessible due to sanctions, Russia faces a pressing need to tap into its gold reserves to support its economy. The liquid part of the NWF decreased by Rb 1121bn to Rb 5012bn (~$55bn) over 2023, and by Rb 3758bn since the beginning of the war. Only 227 bln yuan (~$32 bln) and 359 tons of gold (~$22 bln) remained in the liquid part structure.

Liquidating these assets may be one of the few viable options to secure immediate funding. However, if Russia begins large-scale gold sales, it could increase the supply in the global market, exerting downward pressure on gold prices. Massive sales of such a substantial quantity could diminish gold’s value, impacting the broader market and potentially initiating a price correction.

As these economic strains persist, the likelihood of Russia resorting to its gold reserves grows, making it a critical factor to monitor in the broader landscape of gold valuation and investment trends.

Technical indicators

Gold overbought on monthly timeframe

Several key indicators are signaling that gold may be overvalued at its current levels. On the monthly timeframe, both the Relative Strength Index (RSI) and the Money Flow Index (MFI) show gold deep within overbought zones, indicating strong buying pressure that may be unsustainable. These indicators often suggest a potential pullback, as overbought conditions are commonly followed by price corrections.

Gold overbought on weekly timeframe

On the weekly timeframe, the outlook is even more telling. Gold is exhibiting a bearish divergence with the MFI, a sign that upward momentum is weakening despite high prices. Additionally, the RSI is beginning to exit the overbought zone, reinforcing the idea that a shift in sentiment may be underway. These technical signals point toward a potential cooling period for gold, as overvaluation concerns start to take hold among investors.

Obstacles to Lower Gold Prices

While several factors point toward a potential decline in gold prices, there are significant obstacles that could maintain or even drive up its value.

Geopolitical Factors
Although the new US administration under Trump has expressed intentions to resolve ongoing conflicts, it’s important to recognize that geopolitical tensions may not be easily quelled. The conflict between Russia and Ukraine, as well as unrest in the Middle East, could continue to escalate. Given the entrenched interests and high stakes for each side, there is a risk that these conflicts could intensify rather than diminish. Such geopolitical uncertainties typically reinforce gold’s appeal as a safe-haven asset, making a steep price drop less likely.

Macroeconomic factors
Further rate cuts and weaker inflation in major economies could provide initial support for gold prices. Typically, gold weakens when rates fall but strengthens when they rise. However, Trump's protectionist measures could trigger a resumption of inflation, potentially leading to higher rates, which would strengthen the currency and depress the gold price.

XAUUSD Forecast

Based on the overbought conditions in technical analysis and fundamental factors, we can assume that gold may be waiting for a correction to the 161.8 Fibonacci level at 2400. A rebound from this level will bring gold back to the ATH, but a further breakdown will find support at 1900 level and gold's Fibonacci pocket with a subsequent rise in gold.

On a more global outlook of gold, on a monthly timeframe, we can see the same critical levels that will provide support for the asset.
A bounce off the 2400 level at 161.8 fibonacci, or a bounce off 1900 support in the event of a stronger spill, would further take gold to an ATH update at 3300 and 261.8 fibonacci by 2028.

Conclusion

Gold’s recent rise is driven by geopolitical tensions, economic uncertainty, and central bank demand. With the US election and potential shifts in inflation and policy, the market could see changes. Though a price decline is possible, ongoing risks and inflation may continue to support gold’s role as a safe-haven asset.

Written By: FBS