Conflicts in the Middle East are driving demand for safe havens
The intensifying conflict between Israel and Hezbollah has been a major driver behind gold’s latest rally. Following Hezbollah’s announcement to escalate its involvement in the war with Israel, risk aversion among investors has increased. The escalating war, with no signs of abating, has only strengthened gold’s appeal as a store of value. The situation has further deteriorated after Palestinian militant leaders were killed, with all sides in the region vowing to continue the conflict. Gold’s historic role as a safe haven proves crucial in times of such severe geopolitical uncertainty.
US elections and Fed interest rate expectations boost gold
In addition to geopolitical concerns, the uncertainty surrounding the US presidential elections is providing extra fuel for the gold rally. Markets expect the Federal Reserve could cut rates as early as November, with traders putting a 92% chance of a 25 basis point cut, according to CME’s FedWatch tool. Looser monetary policy tends to support gold prices because lower interest rates lower the opportunity cost of holding the non-yielding metal.
The European Central Bank (ECB) also added to the bullish sentiment by implementing its third interest rate cut of the year, cutting the deposit rate to 3.25%. Further cuts are expected in December, which will support gold demand as a hedge against uncertain economic conditions in both the US and Europe.
Strong economic data sends mixed signals
Despite global uncertainties, US economic data have remained relatively strong. Retail sales rose 0.4% in September, higher than the forecast 0.3%, due to solid consumer spending. However, the housing market showed signs of weakness, with the number of homes and building permits falling last month. These mixed signals have lowered expectations of aggressive rate cuts from the Federal Reserve, but still support a dovish outlook, adding to gold’s continued strength.