Summary:

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• Gold outperforms other asset classes and provides protection against risk events.
• Tailwinds may persist as the Q4 agenda includes the U.S. election, Federal Reserve policy, and geopolitical risks.
• The technical outlook remains positive, suggesting another bull run could begin.

Previously in Q3

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Gold has been shining brightly in the financial markets this year, showcasing an impressive performance. In the third quarter alone, it added another 14% to its value, despite global central bank reserves remaining stable. This growth brings gold's year-on-year increase to a remarkable 42%. To put this into perspective, gold's performance has even surpassed the S&P 500, one of the most widely followed equity indices, which posted a 32% annual return. This exceptional performance underscores gold's enduring appeal as a safe-haven asset and its ability to outperform during times of economic uncertainty.

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Fed rate cuts, recession risks in Q4

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The final quarter of the year is underway, and volatility looms as investors seek answers to several pressing questions.

A potential rate cut could be a key catalyst for the gold rally. An upbeat jobs report was enough to cast doubt on future rate cut expectations.

Investors abandoned hope for additional 50 basis point reductions after employment growth hit a six-month high, unemployment dropped to 4.1%, and wage growth accelerated.

They even began to question the need for further cuts at the next meeting. Treasury yields surged above 4.0%—a level unseen since July—while gold retreated only slightly, cushioned by the escalating rocket attacks between Israel and Iran.

The U.S. economy's service sector behaves as if interest rates are still accommodative. However, it's crucial to note that the unemployment rate is a lagging indicator, confirming rather than predicting changes.

Thus, the improved jobs data shouldn't be taken at face value. Moreover, Thursday's negative reaction to the latest weekly jobless claims suggests investors remain skeptical about the labor market's full recovery.

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Overall, there are several signs that the economy might be weakening. These include:
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• More people are falling behind on credit card and mortgage payments
• Manufacturing activity is slowing down
• There's an unusual pattern in bond yields that often happens before a recession
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This pattern in bond yields, where short-term bonds pay more than long-term ones, isn't always a perfect predictor. However, it usually appears 6 months to 2 years before a recession starts. It's worth noting that we've been seeing this pattern for over a year now.

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If inflation goes down and jobs become harder to find, the Federal Reserve might lower interest rates in the coming months. This could make gold more attractive to buyers. However, if inflation increases and the job market stays strong, the Federal Reserve might wait longer before cutting interest rates.
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US federal election

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The upcoming US federal election will be a major focus for global markets. Current polls show Kamala Harris with a small lead of 2-3% over Donald Trump, but this could easily change. The possibility of Trump winning a second term isn't fully considered in market predictions yet.

If Trump becomes president again, it could lead to higher inflation, especially if Republicans pass big tax cuts for businesses. As countries compete more in artificial intelligence (AI), Trump's tough stance on China might hurt the stock market. This could make investors turn to safer options like gold. In this scenario, Bitcoin might become more closely linked to gold prices, partly because Trump supports cryptocurrencies.

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Harris, on the other hand, doesn't have much experience in foreign policy. She's from California, a state that favors international trade. This has led some to think she might try to improve relations between the US and China. Harris wants the US to be a world leader in the 21st century. She might take a firm stance on China, but probably in a more moderate way, similar to Biden's approach. This strategy likely wouldn't have much effect on the value of precious metals like gold.

Geopolitical risk

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The Middle East situation could stay important in Q4. Israel hasn't said much about how it will respond to Iran's recent big missile attack. They only said their response will be "deadly, exact, and unexpected".

Hezbollah seems to want a ceasefire, but they're not asking for the war in Gaza to end first. However, Netanyahu keeps using force, so it's unlikely a deal will happen soon. As long as both sides keep attacking each other, things might get worse. For now, an attack on Iran's oil facilities isn't likely to happen, at least until after the next US president is chosen.