Supported by expectations of interest rate cuts from the Federal Reserve and demand from the Central Bank, gold started strong in December.

As market expectations for the Federal Reserve (FED) to initiate an interest rate cut cycle heat up, coupled with global central banks continuing to increase gold purchases, gold prices showed a strong start in December, rising about 1% during the London morning session. In November, gold prices saw a big pump of 3.75%, achieving four consecutive months of gains, and are currently still about 3% lower than the historical high of $4,381 set in October. Silver, after soaring 12.8% the previous week, reached a new high, highlighting the continuity of buying interest in precious metals. However, behind the strong bullish momentum, the market must still pay attention to whether the aid from a weak dollar is sufficient to counter potential unfavourable information, especially the global market fluctuation risk brought about by the sharp rise in Japanese government bond yields, which could become an important variable suppressing gold prices.

Interest rate cut expectations and Central Bank buying support have become the main pillars of gold prices.

The core driving force behind the rise in gold prices remains the market expectation that the Federal Reserve (FED) will initiate a rate-cutting cycle. The uncertainties in global politics and geopolitics also provide additional support for safe-haven demand. Demand is equally strong, especially as discussions about “de-dollarization” continue to heat up, with many central banks actively increasing their gold holdings, notably the People's Bank of China, which has been buying in advance. These resonating factors have kept gold prices steadily rising over the past few months.

The end of the war may bring long positions to take profits.

However, there are still doubts about the sustainability of the Central Bank's buying. Any signs of the Central Bank reducing its gold purchases could lead to a rapid profit-taking by leveraged long positions. In addition, geopolitical risks seem to be cooling down. Analysts believe that the geopolitical risk premium brought by the Ukraine war may have eased, as constructive consultations have taken place between Russia and Ukraine to end the war as soon as possible. If the war eventually ends, it could weaken the demand for safe-haven assets. Recent constructive ceasefire consultations among parties related to the Ukraine-Russia conflict, along with progress in the ceasefire in the Gaza Strip and adjustments in the US-China trade war, have gradually reduced market risk aversion. This should logically weaken the appeal of gold prices, but the market's reaction has been limited so far, mainly due to the weakness of the dollar and soft economic data from the United States putting downward pressure on US bond yields, keeping gold prices resilient. However, whether this calm can continue remains uncertain, and the precious metals market may experience severe fluctuations again with any unexpected changes.

Japan's yield surges: A potential source of global risk

The most concerning risk in recent times comes from Japan. The market's expectation of a shift towards more tightening policies has intensified, leading to a sell-off in Japanese bonds and a surge in yields. While the Japanese government is promoting large fiscal stimulus and issuing more bonds, yields are rising simultaneously, triggering investor concerns about the financial health of Japan. If the bond market's decline continues, it will increase government borrowing costs, further dragging down the performance of Japanese assets. This pressure may accelerate reverse arbitrage trading, affecting global markets and subsequently impacting leveraged assets, including gold and silver.

Gold Technical Analysis is Bullish

Technical analysis shows that gold prices remain strong. After several months of consolidation, the 21-day moving average has turned upward again, and the gold price has successfully broken upward through a converging triangle pattern, which is a typical bullish breakout signal. Currently, the market focus is on the $4245 to $4275 range, which is a key overlap of previous support and resistance, as well as the starting point of the last significant pullback at the end of October. Whether this area is successfully broken will determine whether gold prices will continue to set new highs. If gold prices are blocked before the resistance, a retest of $4200 may occur, with the next support level at $4168. However, it is still not advisable to prematurely conclude a failed breakout before obvious sell signals appear.

Long positions still hold the advantage, but the weakness in the stock market is a hidden concern.

Against the backdrop of rising silver prices and strong momentum in gold prices, long positions still dominate. However, the recent weakness in global stock markets presents potential pressure. In the past few years, stocks and gold have shown a positive correlation, and if the stock market continues to decline, it may drag gold prices down. Nevertheless, the market generally believes that gold prices still have room for short-term gains under the support of three key factors: policy expectations, Central Bank buying, and a weak dollar. The next key point is whether gold prices can successfully stabilize above the significant level of 4275 USD, laying the foundation for a new round of price increases.

This article, supported by expectations of interest rate cuts from the Federal Reserve and demand from the central bank, sees gold starting strong in December. It first appeared on Chain News ABMedia.