Gold retreats as bets on outsized interest rate cuts are pared, but Middle East tensions limit losses

Gold prices are in the red despite tensions in the Middle East on Tuesday. On Tuesday, Iran fired ballistic missiles at Israel in retaliation for the latter’s killing of one of its top commanders and leaders of Iranian-backed militias in the region.

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Generally, gold prices rise during times of geopolitical turmoil due to its safe haven value. However, prices retreated after a brief rally Tuesday evening.

At the time of writing, the most active December gold contract on the COMEX was at $2,670 an ounce, down 0.7% from the previous close.

After the attack on Tehran on Tuesday evening, gold prices rose more than 1% to close at $2,690.30 an ounce, close to its record high of $2,696.90 an ounce reached the last week.

What is slowing down the bullish momentum of gold?

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The upward momentum in gold prices has been halted over the past three sessions as the US Federal Reserve has hinted that the pace of easing its monetary policy cycle may be slower.

US Fed Chairman Jerome Powell said on Monday that the central bank was in no rush to cut interest rates.

The move comes after the central bank, at its September meeting, cut rates by 50 basis points, while markets were expecting a 25 basis point cut.

Gold prices retreated this week as bets on an outsized interest rate cut in the coming months faltered after Powell’s comments.

The yellow metal tends to benefit from lower interest rates because it is a non-yielding asset class.

Fxstreet.com said in a report:

However, surprisingly strong data – notably on the fragile US jobs market – and a cautious speech from Fed Chairman Jerome Powell on Monday have since reduced bets on a double cut of 50 basis points, by more than 60% last week to just 37% at press time Wednesday.

Bullish Long-Term Outlook for Gold

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Even though gold prices have fallen slightly over the past few days, the outlook for price developments remains bullish in the coming months.

The price of gold has increased by almost 30% since the start of the year and has broken new records. Kitco.com analysts believe that the rise in the price of gold is far from over in the medium and long term.

Additionally, on Monday, Goldman Sachs raised its forecast for the price of gold to $2,900 per ounce in early 2025, from $2,700 per ounce earlier.

“We reiterate our long recommendation on gold due to the gradual increase in lower global interest rates, structurally higher demand from central banks and the hedging benefits of gold against geopolitical, financial risks and recession,” the bank said.

Analysts at fxstreet.com said that gold prices could continue their upward trend above the $2,700 per ounce level if prices cross the $2,680 per ounce level again.

However, a break below the trendline at around $2,615-$2,620 would be a bearish sign and suggest a complete reversal of the short-term uptrend.

High gold prices weigh on physical demand

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Record high gold prices have negatively impacted demand for jewelry and other items in countries like China and India. These two countries are the largest consumers of gold.

Demand for physical gold increased in August after India reduced its import duties on the yellow metal. However, demand has remained weak since then as consumers struggled to cope with rising prices, Prithviraj Kothari, president of the Indian Bullion and Jewelers Association, was quoted as saying by Reuters.

According to Commerzbank AG, physical demand for gold may remain weak in Asia due to sharp price increases and record price levels.