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Gold has suffered its worst weekly performance in three years, as investors react to the surprise victory of Donald Trump in the U.S. presidential election and the subsequent surge in the U.S. dollar. Throughout the week following the election result, gold saw its rally abruptly halted, with prices dropping as much as nearly 6%. This steep decline in gold prices was largely driven by the market’s reassessment of risk, spurred primarily by expectations of higher interest rates, infrastructure spending, and fiscal stimulus under a Trump presidency. Historically, these factors tend to dampen the appeal of gold, as rising interest rates make yield-bearing assets more attractive, reducing the demand for non-yielding assets like gold.
The post-election surge in the U.S. dollar further compounded the downward momentum for gold. The U.S. Dollar Index ($DXY) climbed to its highest levels in nearly a year, as global investors flocked to dollar-denominated assets, buoyed by the potential for stronger domestic growth under a Trump administration. This flight to the dollar also put pressure on other major currencies, including the euro and the yen, which in turn made the precious metal more expensive for holders of those currencies. Gold, which is often seen as a hedge against a weakening dollar, faced a double blow as both the heightened demand for the greenback and expectations of rising interest rates weighed on its allure.
Adding to gold’s woes was the increasing speculation that the Federal Reserve would accelerate the pace of interest rate hikes. Prior to the election result, market participants had largely expected a more gradual path of tightening. However, with the anticipated boost in fiscal stimulus from a Trump-led government, inflation expectations have increased, making it more likely that the Fed will intervene to contain inflationary pressures. As inflation expectations rise alongside potential growth in government spending, real interest rates could climb, further diminishing the attractiveness of gold as an inflation hedge and safe-haven asset. This shift in market dynamics has led some analysts to forecast even more weakness in the near term for gold prices.
Nevertheless, while gold’s short-term pain has been evident, longer-term forecasts remain less certain. Some market participants believe that geopolitical uncertainty and potential disruptions to global trade policies under Trump’s administration could reignite demand for safe-haven assets. Furthermore, concerns over rising inflation, political transitions in Europe, and the possibility of future dollar weakness could create a more favorable environment for gold. The recent pullback in prices has some investors questioning if this is a healthy correction or just the beginning of a more prolonged decline for the asset. Ultimately, gold’s future will likely hinge on the balance between rising growth prospects, inflation expectations, and geopolitical risks.
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