Technology stocks tumbled on Thursday as investors worried that Democrats, after securing control of both chambers of the U.S. Congress, will tighten regulatory policy on artificial intelligence (AI), spurring demand for safe-haven U.S. Treasuries and pushing yields to their lowest levels since early September.
At the same time, helped by falling Treasury yields, gold is on track to rise more than 5% this week, potentially posting its largest weekly gain since August. As of press time, spot gold was trading at $4,080.
Midterm Election Results Put Gold on Course for Best Weekly Performance Since August
Beyond safe-haven demand, the decline in Treasury yields was also driven by lower inflation expectations. Investors are betting that Democrats, who are about to take control of Congress, will push to end the war with Iran that has been driving energy prices higher, which sent oil prices sharply lower on Wednesday.
In addition, investors are betting that Democratic control of Congress will constrain the Trump administration's room to expand the fiscal deficit, compressing the supply premium embedded in long-dated bonds.
Gold typically benefits from lower interest rates. However, some investors sold precious metals to offset losses from the stock market decline, which somewhat capped gold's advance. In theory, limited fiscal expansion is also a relatively unfavorable factor for gold, since some investors use the metal as a hedge against heavy government spending and budget deficits.
After weekly initial jobless claims came in below all market expectations, traders will look to U.S. October nonfarm payrolls data later on Friday for the next clues on the economic outlook and the path of interest rates.
Although this gold rally is the most pronounced breakout from its months-long slump, prices are still down more than one-fifth since the U.S.-Iran war broke out in late February. The war-driven surge in energy prices prompted monetary policy to tighten.
Analysts including Sim Moh Siong of OCBC said in a report: "Encouragingly, gold is once again responding positively to a favorable macroeconomic environment. We are cautiously optimistic that gold may be finding a bottom. However, an easing of expectations for Fed tightening and a renewed pickup in investment demand remain key to sustaining gold's rally."
Looking ahead to the fourth quarter, global gold ETFs, Western-market bar and coin demand, derivatives and over-the-counter trading demand may face multiple macro forces pulling against each other: rising policy rates, higher bond yields and a stronger dollar could weigh on gold demand, while fiscal concerns, inflation risks, geopolitical tensions and financial market stress are expected to support demand.
Looking at the gold market through year-end, Louise Street, senior market analyst at the World Gold Council, believes bullish and bearish factors are roughly balanced. Although rising interest rates and diverging inflation expectations may pressure gold prices, a mix of geopolitical risks and financial market stress could prompt market participants to turn to gold in search of stability.
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