Democrats swept Congress in the US midterm elections, driving the dollar and US Treasury yields lower, and gold extended its gains after surging more than 3% on Wednesday.
Gold is currently trading above $4,100 per ounce. In the previous trading session, gold posted its largest single-day gain since August, reclaiming the key support level of $4,000 per ounce.
As of press time, spot gold rose 1.63% to $4,126.45. On Wednesday, influenced by news of the Democratic victory, Treasury yields fell across all maturities along the curve, and the dollar weakened by 0.4%. On Thursday, the dollar and Treasury yields declined further.
Democrats now control both the House and the Senate, while the US President remains Republican Donald Trump, meaning the US will enter a state of "divided government." This could bring several changes: the Trump administration will face greater resistance in pushing new fiscal stimulus and large-scale spending plans; Democrats may block or limit parts of the Republican policy agenda; and tariff, trade, and geopolitical policies may face more congressional checks.
Meanwhile, the market interpreted the Democratic sweep as a political signal pointing toward de-escalation of the Iran war. US Vice President Vance explicitly attributed the Republican defeat to the Middle East conflict on social media, further reinforcing the de-escalation narrative. These factors combined to push the dollar and Treasury yields lower.
Since gold itself does not generate interest income, a weakening dollar and falling Treasury yields are typically beneficial for gold prices. Although this gold rally is the most pronounced breakout from its months-long slump, gold prices have still fallen by more than one-fifth since the outbreak of the US-Iran war in late February. The energy price surge triggered by the war prompted monetary policy to tighten.
Analysts at Oversea-Chinese Banking Corporation, including Sim Moh Siong, said in a report: "Encouragingly, gold is once again responding positively to a favorable macroeconomic environment. We are cautiously optimistic that gold prices may be finding a bottom. However, the easing of Federal Reserve tightening expectations and the recovery of investment demand remain key to sustaining gold's rally."
Traders will focus on the US nonfarm payrolls report scheduled for release on Friday for more clues about the economy and interest rate trajectory. If the data shows inflation is under control, it will provide the Fed with greater room to implement monetary policy easing.
Looking ahead to the fourth quarter, global gold ETFs, Western market bar and coin demand, derivatives, and over-the-counter demand may face multiple competing macroeconomic forces: rising policy rates, higher bond yields, and a stronger dollar could suppress gold demand; while fiscal concerns, inflation risks, geopolitical tensions, and financial market stress are expected to provide support for gold demand.
Looking at the gold market through year-end, Louise Street, Senior Market Analyst at the World Gold Council, believes that bullish and bearish factors are roughly balanced. Although rising interest rates and diverging inflation expectations may weigh on gold prices, the combination of geopolitical risks and financial market pressures may prompt market participants to turn to gold in search of stability.
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