Gold prices fell sharply on Thursday, halting a multi-session rally. This decline was driven by two main factors: easing geopolitical tensions, which diminished the appeal of the precious metal as a safe haven, and diminishing investor expectations of an imminent US interest rate cut, which strengthened the dollar and weighed on gold.
General context: Gold as a safe haven
Gold has historically been known as the primary “safe haven” during times of crisis. When global political or economic turmoil intensifies, investors tend to convert their assets into gold to preserve their value. We have witnessed this behavior repeatedly during global financial crises, wars, and major trade tensions. While the recent event regarding the US backing down from its stance on Greenland may seem to have a limited impact, it serves as a microcosm of how markets respond to de-escalation. With every sign of stability, investors flock to higher-risk assets like stocks in search of higher returns, which draws liquidity away from the gold market.
Impact of US monetary policy
The second, equally important factor is the monetary policy of the Federal Reserve (the US central bank). There is a strong inverse relationship between interest rates and gold prices. When interest rates rise, the opportunity cost of holding gold, which does not generate a yield, increases. Conversely, interest-bearing assets such as government bonds become more attractive. Current expectations, as shown in a Reuters poll, indicate that the Fed may keep interest rates unchanged in the near term, which strengthens the US dollar. Since gold is priced in dollars, a stronger US currency makes it more expensive for buyers using other currencies, thus reducing demand.
Performance of other precious metals
The impact wasn't limited to gold; other precious metals markets also experienced mixed movements. While silver, platinum, and palladium are influenced by investor sentiment toward safe havens, they also have extensive industrial applications. Consequently, their prices are significantly affected by global economic growth forecasts and demand in sectors such as the automotive and electronics industries. Looking ahead, the trajectory of gold prices will remain contingent on a delicate balance between global geopolitical developments, monetary policy decisions by major central banks, particularly the US Federal Reserve, and the performance of the dollar in foreign exchange markets.
