Gold Prices Decline Amid Risk-On Sentiment: A Short-Term Retreat and Medium-Term Outlook

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

Key Drivers Behind Gold’s Decline

1. Risk-On Market Sentiment
   The markets opened the week with renewed confidence following Scott Bessent’s nomination as U.S. Treasury Secretary, 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.
2. Stronger U.S. Economic Data
   Optimism over a strengthening U.S. 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.
3. Fed Policy Expectations and Bond Yields
   Recent hawkish remarks by Federal Reserve officials have moderated expectations for aggressive rate cuts. The CME Group’s FedWatch Tool reflects a 55% 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.

Caution for Bears: Supporting Factors for Gold

Despite the bearish tone, there are factors that could limit further downside for gold. Retreating U.S. bond yields, coupled with a softer U.S. dollar due to profit-taking at recent highs, may offer temporary support. Moreover, the market awaits critical data points, including the U.S. 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.

Medium-Term Outlook

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

Investors should remain vigilant and monitor upcoming economic data and geopolitical developments, which will likely shape gold’s path in the weeks ahead.