Will the US election result spark a gold correction?

Ole Hansen

Head of Commodity Strategy

Key points

  • Gold's record-breaking rise continues ahead of the US election, seen as a major risk event that could trigger a market reaction
  • The lack of response to the Middle East de-escalation supports the view that the latest strength is increasingly being seen as a hedge against the US election
  • Depending on the outcome, there is an increased risk of a USD 100+ correction next week
  • Options market showing some favouritism towards silver, a metal that trades relatively cheaply compared to gold and around one-third below the 2011 record at USD 50

Gold's record-breaking rise continues ahead of the US election, seen as a major risk event that could trigger a market reaction, especially if results differ from expectations of a Trump victory. Gold is up 5% this month and 34% on the year, second only to silver, which has surged 42.3%. These rallies prompt concern over potential unsustainable gains and a possible peak.

Currently, gold and silver show no euphoria—only strong rallies as investors seek safe assets amid concerns over fiscal instability, safe-haven demand, geopolitical tensions, de-dollarisation driving strong demand from central banks, Chinese investors turning to gold amid record-low savings rates, and recently, as mentioned, increased uncertainties surrounding the US presidential election  safe-haven demand, geopolitical tensions, central bank de-dollarization, and increased demand from Chinese investors due to low savings rates and property market concerns. Additionally, rate cuts by the Fed and other central banks are reducing the cost of holding non-interest-bearing assets like gold and silver.

In the past month, gold and US Treasury yields have moved higher as the odds of a Trump win rose - Source: Bloomberg

It is also worth noting the lack of response to the Middle East de-escalation seen in crude oil prices—which slumped the most in two years on Monday—leading us to conclude that the latest strength is increasingly being seen as a hedge against a potential “Red Sweep” at the 5 November US election, where one political party, in this case, the Republicans, controls both the White House and Congress. This scenario has lifted US bond yields amid concerns about excessive government spending, pushing the debt-to-GDP ratio higher, while fuelling inflation fears through tariffs on imports as well as geopolitical risks.

Besides the election, the market maintains a steadfast belief that the US Federal Reserve will announce a 25 basis-point rate cut at the 7 November meeting, further supporting demand in gold-backed ETFs. Following two years of net selling, total holdings in bullion-backed ETFs hit a low point in May before Western ETF investors finally returned as buyers, having been net sellers since the Federal Reserve began its aggressive rate-hiking campaign back in 2022. Read more about demand trends in the just published “Gold Demand Trends Q3 2024” from the World Gold Council.

Total holdings in bullion-backed ETFs and Managed Money net long in futures - Source: Bloomberg & Saxo

Nothing ever goes in a straight line, and having rallied as much as it has, gold can still run into a deep correction—potentially after 5 November should the election result not deliver the keys to the White House and Congress to one party. However, as long as the mentioned reasons for holding gold do not go away, the prospect for even higher prices remains. With that in mind, we see the risk of a USD 100+ correction next week; however, as per the chart below, a correction will find support at USD 2,685, while a break below USD 2,600 is likely needed to trigger an even bigger move, which at that point would be led by long liquidation from hedge funds holding a 24-million-ounce long in the futures market.

Spot Gold - Source: Saxo

What is the options market telling us?

Looking at the top ten most traded options strikes in gold and silver futures in the last week, we find, unsurprisingly, an overriding focus on bullish strategies. However, it is interesting to note some favouritism towards silver, a metal that trades relatively cheaply compared to gold and around one-third below the 2011 record at USD 50. As per the table, we find eight of the ten most traded strikes are calls, most notably the USD 35 and USD 40 calls, both expiring in 26 days on 25 November. In gold, a few put strikes have started to emerge as traders hedge against a setback following the yellow metal’s record-breaking run. While the most traded strike is the USD 2,900 call, also expiring on 25 November, both the USD 2,650 and USD 2,600 puts have attracted some demand
Top ten most traded options strikes in gold and silver - Source: Bloomberg and Saxo

Recent commodity articles:

22 Oct 2024: Podcast: The Trump trade enters the metal market
21 Oct 2024: COT: Dollar shorts squeezed; Shift in commodity exposure from energy to metals
18 Oct 2024: Commodity weekly: Gold's record-breaking run continues
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