Gold Holds Above $4,000 as Dollar, Yields Fall on Midterm Result

What happened

Gold prices maintained their largest surge since August, holding above $4,000 per ounce. The rally was driven by the outcome of the US midterm elections, where Democrats secured a significant victory, gaining control of Congress. This political configuration led to a decline in the US dollar and a drop in US Treasury yields.

Why it matters

The Democratic victory in Congress alters the political landscape in Washington, which tends to create uncertainties regarding the country's future fiscal and economic policies. Historically, during periods of heightened political uncertainty or when expectations of increased public debt arise, safe-haven assets like gold tend to appreciate. The fall in Treasury yields also makes gold, which pays no interest, relatively more attractive compared to fixed-income securities.

Market impact

• Rates and Bonds: Treasury yields fell, reflecting expectations of a political scenario that could lead to higher debt issuance or a less restrictive fiscal policy. This makes bonds less attractive in terms of yield.
• Dollar and FX: The US dollar depreciated against other currencies. Political uncertainty and potential shifts in economic policy may lead investors to reduce their dollar holdings.
• Equities: The impact on stock markets is mixed. On one hand, political uncertainty could generate volatility. On the other hand, more expansionary fiscal policies, if they occur, could theoretically boost economic growth and, consequently, the stock market in the medium term.
• Commodities: Gold, as a safe-haven asset, directly benefited from the dollar's decline and the search for security.
• Brazil: The Brazilian Real may benefit from the global dollar depreciation, although the domestic political scenario and global risk appetite remain key determinants. Falling global yields could attract some flow to emerging markets, but international volatility might limit this effect.

What to watch

The next steps of the new congressional makeup regarding fiscal and budget policy will be crucial. The reaction of Treasury yields and the dollar's trajectory in the coming weeks will provide indications of the market's perception of stability and the US economic outlook. Monitoring communications and decisions from the Federal Reserve (Fed) on monetary policy will also be important.

Scenarios

Base Case: Gold holds at elevated levels, with the dollar and Treasury yields on a downward or stable trajectory as the market prices in the new political dynamics in the US and their fiscal implications.

Risk Case: A rapid reversal in the trend of falling yields and dollar, should signs of greater fiscal control or a stronger-than-expected economic outlook emerge, could pressure gold lower.

Original source: Bloomberg Markets. For information only, not investment advice.