Gold just failed at $4,150. This is the next stop

The XAU/USD pair entered a consolidative stage at the end of September, which extends to these days despite fluctuating US Dollar (USD) demand. For the most part, the Greenback has outperformed most major rivals on bets that the Federal Reserve (Fed) will have no choice but to keep hiking interest rates after delivering a modest 25 basis points (bps) hike when it met in September.

Big picture vs near-term picture

That demand for the precious metal took a turn for the worse is no news. Gold has edged lower five of the last seven months and, throughout the current one, has been unable to attract any meaningful interest.

True, a floor appears around the $4,000 psychological threshold, with dips below the level attracting buyers, which, anyway, are far from enough to revive the glorious bullish trend.

US government bond yields have reached multi-decade highs amid concerns about upcoming rate hikes due to untamed inflation. The latter has to do with soaring energy prices resulting from the Middle East war, pushing Oil prices up. Meanwhile, investors are concerned about whether the AI tech frenzy went too far.

The near-term trend, or better said, the lack of one, seems related to easing United States (US)Treasury yields and a retracement in Oil prices. The better performance of Wall Street in the middle of an earnings season amid a bounce in chipmakers adds up for sure.

US mid-term elections around the corner

And while investors are already chewing more than they can swallow, a gentle reminder: the US mid-term elections are taking place in roughly two weeks. Approval for US President Donald Trump is at an all-time low of 32%, according to a September Reuters poll, not a surprise after recent data showed that gas prices jumped more than 9% in September from August, accounting for more than half of the month’s overall price increase.

Source: US Bureau of Labor Statistics

Whether Republicans can or cannot retain Congress will define whether the USD stays on a bullish path, even against the precious metal. A Republican victory would keep President Trump in the driver’s seat, meaning no changes in the political or fiscal paths.

If Democrats take over the House and/or the Senate, however, Trump will have less control over federal spending. Uncertainty surrounding the Middle East is likely to increase, alongside inflationary pressures, taking a toll on economic growth. The Fed may have to act expeditiously, resulting in Chair Kevin Warsh losing credibility and probably facing Trump’s anger.

In such a scenario, USD demand may lose steam, but for Gold, it would hardly mean a recovery towards record highs. XAU/USD can recover at most to the $4,500 region, where the pair topped in September.

But rest assured, it won’t be a smooth run, but a painful one. The likelihood of things going downhill fast and furious just because of the mid-term elections’ outcome is quite low. 

The next inevitable and temporal stop

While speculative interest pared back bets on higher Gold prices, investors remain wary about selling the precious metal. Uncertainty, indeed, tends to at least keep safe-haven assets afloat. But given that uncertainty won’t clear up anytime soon, the current scenario, in which Gold will slowly but steadily grind lower, should prevail.

The $4,000 barrier is still strong enough to attract some shy buying interest, but the stop around the level should be temporary, with lower lows likely once the Fed delivers its next hike. And it will happen, no doubt about that.