Gold prices took a breather on Wednesday, pulling back slightly after a rally driven by escalating tensions in the Middle East. The precious metal slipped 0.4% to $2,652.62 per ounce in the early hours of trading, retreating from the more than 1% jump it saw on Tuesday after Iran launched missile strikes on Israel. U.S. gold futures also edged down by 0.6% to $2,673.90. Despite the dip, gold remains close to its recent highs, with market participants watching closely for more signals from U.S. economic data and Federal Reserve policy.
"Gold is just seeing some short-term pressure due to a stronger dollar, but the environment remains extremely favorable for gold," said Carlo Alberto De Casa, a market analyst at Kinesis Money. Geopolitical uncertainty, particularly the possibility of retaliation from Israel, continues to underpin the metal's safe-haven appeal.
U.S. Interest Rates Remain a Key Driver
The future trajectory of U.S. interest rates remains one of the primary factors driving gold prices. Gold's strong performance in 2024, which has seen it rise by 28%, has been largely attributed to expectations of monetary easing by the Federal Reserve. Lower interest rates typically make gold more attractive to investors by reducing the opportunity cost of holding the non-yielding asset.
Traders are now focused on upcoming U.S. economic data, including employment figures due later this week. Market participants are particularly interested in Friday's nonfarm payrolls report, which could offer further clues about the Federal Reserve's next move. Currently, there is a 37% chance of a 50 basis point rate cut by the Fed in November, down from 60% last week, following stronger-than-expected U.S. economic data and cautious remarks from Fed Chairman Jerome Powell earlier this week.
"If the data comes in weak and raises the chances of a 50 basis point cut in November, we could see gold hitting record prices again," De Casa added.
Geopolitical Risk Bolsters Gold's Appeal
Tuesday's missile attack by Iran, in retaliation for the assassination of Hezbollah leader Hassan Nasrallah, has further heightened gold's appeal as a hedge against geopolitical risks. As tensions between Israel and Iran escalate, with the potential for further conflict in the region, investors have flocked to safe-haven assets like gold. The metal's price surge on Tuesday was a direct response to Iran's missile barrage, which targeted key Israeli locations, although many were intercepted by Israel's missile defense systems.
"The instability in the Middle East is supporting gold prices as investors seek safety amid rising geopolitical tensions," said Daniel Hynes, a senior commodities strategist at ANZ. "Longer-term, the outlook for real interest rates is going to be a key driver for gold."
Analysts Predict Higher Prices Ahead
Despite the recent volatility, many analysts remain bullish on gold's long-term prospects. Several large banks, including Goldman Sachs and UBS, have revised their price targets for the metal, anticipating that it could climb even higher in the coming months. Goldman Sachs, for example, recently raised its gold price forecast to $2,900 by early 2025, citing expectations of lower global interest rates, increased central bank demand, and ongoing geopolitical risks.
"We reiterate our long gold recommendation due to the gradual boost from lower global interest rates, structurally higher central bank demand, and gold's hedging benefits against geopolitical, financial, and recessionary risks," Goldman Sachs said in a note.
UBS strategist Joni Teves also expressed optimism about gold's outlook, telling Bloomberg News that the macroeconomic backdrop is supportive of higher prices. "The fact that real rates are coming down and the Fed is in easing mode is favorable for gold," Teves said. "Physical demand is also resilient, even at these higher prices."
Teves dismissed concerns that the market may be overextended due to the heavy long positioning in gold derivatives. "If you look at historical data, we're still not at all-time highs in terms of positioning, and broader market positioning is not stretched," she said.
Silver and Other Precious Metals See Gains
Other precious metals have also seen gains alongside gold. Silver edged up 0.1% to $31.43 per ounce on Wednesday, with analysts predicting it could outperform gold in the near term. Saxo Bank noted in a report that silver, supported by a stabilizing industrial metals sector, could potentially rise to $40 next year, as it remains relatively cheap compared to gold.
Platinum and palladium also saw upward momentum, with platinum rising 1% to $995.95 and palladium adding 1.6% to $1,010.24.
