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Gold prices plunges nearly 3% as safe haven appeal wanes

Spot gold suffers biggest daily percentage decline since November 06

Gold prices faced a sharp drop on Monday, retreating from a three-week high, as a risk-on environment diminished the appeal of the precious metal.

Gold prices plunged about 3 per cent on Monday, breaking a five-session rally to its highest in nearly three weeks, as reports of Israel nearing a ceasefire with Hezbollah, coupled with Trump’s nomination of Scott Bessent as the US Treasury Secretary soured the precious metal’s safe-haven appeal, Reuters reported.

Spot gold fell to $2,634.78 per ounce by 1525 GMT, its biggest daily percentage decline since November 06. US gold futures shed 2.8 per cent to $2,636.50, according to Reuters data.

The XAU/USD pair struggled to sustain its momentum from last week’s gains, though it managed to hold above the $2,650 level, supported by the 100-period Simple Moving Average (SMA) on the 4-hour chart.

The medium-term outlook for gold remains nuanced, with several competing factors at play, analysts say.

Persistent inflationary pressures and the potential for geopolitical tensions to flare up again could revive demand for gold as a safe haven. Conversely, if the US economy continues to show robust growth and the Fed maintains a cautious approach to rate cuts, gold could struggle to sustain upward momentum.

“For now, gold’s ability to hold above technical support levels like the 100-period SMA will be critical in determining its next moves. A break below these levels could signal further weakness, while a stabilization above $2,650 might set the stage for a recovery if market conditions shift,” said Mohamed Hashad, chief market strategist, Noor Capital.

The markets opened the week with renewed confidence following Bessent’s nomination, which helped alleviate uncertainties. “Coupled with reports of progress towards a ceasefire between Israel and Hezbollah in Lebanon, this development reduced geopolitical risks, encouraging investors to shift toward riskier assets like equities, thereby dampening demand for gold,” Hashad said.

Optimism over a strengthening US economy further contributed to gold’s sell-off. The S&P Global Composite PMI rose to 55.3 in November, marking its highest level since April 2022, suggesting accelerated economic growth in the fourth quarter. This bolstered investor confidence in business-friendly policies anticipated under the new administration, further sidelining gold.

Recent hawkish remarks by Federal Reserve officials have moderated expectations for aggressive rate cuts. The CME Group’s FedWatch Tool reflects a 55 per cent probability of a modest 25-basis-point cut in December. While bond yields initially saw a sharp decline due to Bessent’s conservative fiscal outlook, the stabilization in yields added to the pressure on non-yielding assets like gold.

Gold advanced nearly 6 per cent last week, soaring past the closely watched $2,700-mark. This marked its steepest climb in nearly 20 months. Last week’s rally was primarily fuelled by haven demand as geopolitical tensions between Russia and Ukraine escalated. This helped offset any pressure from a stronger greenback. As a result, gold gained by a substantial $170 from a two-month low of $2,536.71.

“This week, we can expect a flurry of data that could indicate the Fed’s likely path moving forward. These include minutes of the central bank’s November meeting, consumer confidence, and personal consumption expenditure data. Gold is trading lower by 1.66 per cent at $2,671. It has 50-SMA support at $2,665 on the day chart with next support at $2,628. It could encounter resistance at $2,683,” said Vijay Valecha, chief investment officer, Century Financial.

Supporting Factors for Gold

Despite the bearish tone, there are factors that could limit further downside for gold. Retreating US bond yields, coupled with a softer US dollar due to profit-taking at recent highs, may offer temporary support. “Moreover, the market awaits critical data points, including the US Personal Consumption Expenditure (PCE) Price Index and the Federal Open Market Committee (FOMC) meeting minutes, which could influence monetary policy expectations and gold’s trajectory. Investors should remain vigilant and monitor upcoming economic data and geopolitical developments, which will likely shape gold’s path in the weeks ahead,” Hashad said.