Gold needs a decisive break above $2,000 as investors turn their attention to the Fed

NEW YORK (October 31) So far, Israel's war with Hamas has remained within Gaza's borders, and as the world adjusts to the conflict in the Middle East, gold could be losing its safe-haven allure.

Gold prices have been unable to hold the line at $2,000 an ounce as focus once again returns to the Federal Reserve's monetary policy, which supports U.S. dollar strength and higher bond yields that remain within striking distance of 5%.

December gold futures last traded at $1,993.60 an ounce, down 0.59% on the day. The renewed selling pressure comes one day before the Federal Reserve releases its latest monetary policy statement.

Ricardo Evangelista, senior analyst at ActivTrades, notes that gold remains in a tug of war with the market supported by geopolitical uncertainty and weighed down by the Federal Reserve's hawkish monetary policy stance.

"The conflict in Gaza dominates attention, and as the ground invasion by Israel seems to be materializing, the financial markets continue to price in the risk of an escalation, driving demand for the haven gold," he said in a note Tuesday. "At the same time, the US dollar remains strongly supported in relation to other major currencies, with the index that measures its performance close to the two-year maximum touched earlier in the month. The Federal Reserve is meeting this week, and there is still some uncertainty about whether Jerome Powell and his peers will hike rates once more; this uncertainty keeps the greenback supported and treasury yields high, capping the upside for gold generated by the haven trade."

Markets are expecting the Federal Reserve to leave interest rates unchanged following Wednesday's monetary policy meeting; however, there are growing expectations that the central bank could maintain restrictive interest rates through the first half of 2024.

“The Fed will likely maintain a broadly hawkish policy tilt, consistent with the Sep dot plot," said fixed income analysts from TD Securities. "However, the Committee will reiterate that it aims to “proceed carefully" as it formulates the next policy steps."

Commodity analysts at Commerzbank said that any suggestion from Federal Reserve Chair Jerome Powell that a rate hike is still on the table at the December meeting could put more pressure on gold in the near term.

They added that markets will also be looking to Friday's nonfarm payrolls data for signs of slack in the marketplace.

“If this fails to materialize yet again, a Fed rate hike in December could become more likely again. It is true that interest rate expectations have had less of an influence on the gold price of late, but that doesn't necessarily mean that this will continue to apply to the coming weeks," the analysts said. “We would therefore warn against assuming that the upswing in gold that we have seen in recent weeks will simply continue, as it has been due to exceptional circumstances."

Alex Kuptsikevich, senior market analyst at FxPro, said that gold faces an uphill battle as resistance at $2,000 continues to hold.

Kuptsikevich added that with 10-year bond yields holding around 5%, this could be an attractive entry point for investors, which would siphon investment capital away from gold.

“As more and more major central banks switch from an active rate-hiking mode to a wait-and-see approach, the moment of policy reversal is approaching. This increases the attractiveness of long-dated bonds, gold's main competitor," he said. “The attractive yield on government bonds justifies selling gold in the current circumstances."

In the current environment, he said that it's more likely that gold falls back closer to $1,800 than that it rallies to $3,000.

According to some analysts, if gold wants to keep its current luster, prices need to break above $2,000 an ounce decisively.

“While it is making brief moves above this major psychological level, it's failing to get any traction at this moment," said Craig Erlam, senior European market analyst at OANDA. "That further reinforces how big a resistance level this is and if it can make a significant move above, it could accelerate as a result."

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