Gold surged to two-week highs on expectations that Democrats would curb inflation and prompt the Fed to abandon monetary tightening. However, things are not that simple. Let’s discuss this topic and outline a trading plan for XAU/USD.
The article covers the following subjects:
Major Takeaways
- A weaker US dollar has supported gold.
- Central banks are stepping up their gold purchases.
- Gold is watching the US labor market.
- A breakout above $4,105 would be a signal to buy XAU/USD.
Fundamental Forecast for Gold Today
Gold benefited from the Democrats’ victory in the midterm elections. Falling Treasury yields, a weaker US dollar, and declining oil prices all provided powerful tailwinds for XAU/USD. At the same time, the World Gold Council (WGC) reported positive trends in investment demand for the precious metal. However, the euphoria proved short-lived.
Gold and US Dollar Performance
Source: Bloomberg.
Central banks accelerated their gold purchases to 321 tonnes in the third quarter, the strongest quarterly performance since late 2024. Purchases totaled 675 tonnes from January through September, up 6% from the same period last year. Meanwhile, holdings in gold-backed exchange-traded funds increased by 211 tonnes to a record 4,256 tonnes. Together, these figures point to strong investment demand, supporting gold even when external conditions are unfavorable. Fortunately for gold bulls, the backdrop turned favorable after the Democrats’ midterm victory. The question is, for how long?
Investors believe Democrats will be more effective than Republicans at tackling inflation, although this may come at the expense of economic growth and domestic demand. Indeed, tighter regulation of artificial intelligence, congressional opposition to further tax cuts, and resistance to increased government spending could slow GDP growth. Together with slowing inflation and the possibility of the Fed shifting from rate hikes to rate cuts, this would give gold a strong boost. Its strongest weekly performance since August should therefore come as no surprise.
Gold Weekly Performance
Source: Bloomberg.
However, several factors could change the market outlook. A presidential veto or an escalation of the conflict in the Middle East could significantly alter the balance of power in financial markets. Moreover, gold is still used as a source of liquidity. As a result, a broad sell-off in US equities and record losses in the market capitalization of the S&P 500 and Nasdaq Composite pushed XAU/USD down from its recent highs.
What comes next? The euphoria in some markets and panic in others following the Democrats’ midterm victory are gradually fading. Investors are shifting their attention from politics to the economy. The standoff between a Democratic-controlled Congress and a Republican White House will be long, and its economic impact will take time to materialize. Macroeconomic data and Fed monetary policy, by contrast, are moving markets here and now.
XAU/USD Trading Plan for Today
Against this backdrop, US employment and inflation data will influence XAU/USD as much as the midterm elections. Weak labor market data would provide a reason to buy gold on a breakout above resistance at $4,105 per ounce. Conversely, labor market data in line with or slightly above forecasts would likely cause gold to consolidate ahead of the CPI report.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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