Gold edges up from two-month trough; $4,275 level key, says Pepperstone

The recovery in gold appears more like a pause in the dollar's decline than a genuine shift in direction, with traders focusing on the $4,275 level highlighted by Pepperstone as a key confirmation point. Bond market dynamics are the more significant factor: if investors interpret rising long-term yields as an indicator of fiscal and credit stress instead of economic robustness, gold might decouple from real yields and reclaim its safe-haven status. Middle East tensions have so far pressured gold through elevated oil prices, inflation expectations and rate outlooks; therefore, reports of possible fresh US strikes on Iran could weigh on bullion further unless they spark widespread risk aversion. The start of trading in Shanghai after Golden Week presents a test of Chinese physical demand.

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Gold has steadied as the dollar takes a break, but with a December rate increase from the Fed already largely factored in, market observers say a decisive move upward is required for the bears to relinquish control.

Key points:

• On Thursday, gold rose as the US dollar pulled back from an 18-month peak, bouncing off a two-month low.
• Bullion fell to its lowest point since 5 August on Wednesday, under pressure from a stronger dollar and higher bond yields.
• According to Pepperstone's Chris Weston, the near-term outlook for gold is still difficult, and a climb beyond $4,275 is necessary to become more positive.
• Weston noted that gold might separate from bond yields if the market starts seeing longer-term yield increases as a sign of fiscal and credit dangers.
• Minutes from the Fed's September meeting revealed full backing for the rate increase, though motivations varied. Traders see an 18% likelihood of a hike this month and an 80% probability for December.

Gold prices climbed on Thursday as the US dollar declined from its strongest level in 18 months, enabling the metal to regain some lost ground after it had fallen to a two-month low the day before.

Gold hit its lowest point since 5 August on Wednesday, dragged down by a firmer dollar and elevated Treasury yields. Analysts commented that the subsequent bounce hardly altered the short-term outlook.

In remarks cited by Reuters, Chris Weston, head of research at Pepperstone, said: "The short-term investment case for gold remains challenged. For now, it remains a seller's market, and we would need to see a break above $4,275 to become more constructive on the near-term upside."

Weston further described a situation where gold's connection to bond markets might shift. "If markets begin treating rising long-end yields as a reflection of sovereign credit and fiscal risk rather than stronger economic fundamentals, gold could start to diverge positively from bond yields and the debasement trade could return with greater force," he stated.

Policy expectations continue to act as a drag. Minutes from the Fed's September gathering, published on Wednesday, indicated that all members supported the quarter-point rate increase, though for varying reasons. A number of officials saw a higher rate trajectory as cautious protection against ongoing inflation from energy and other price pressures, while some considered it essential based on their main economic projection. The majority believed that a further hike would probably be warranted by the end of the year.

Financial markets have already adjusted accordingly. According to the CME FedWatch tool, traders assign only an 18% chance of a rate rise at the Fed's meeting later this month, but an 80% probability for December. This figure has increased from about 69% on Wednesday morning prior to the minutes' release.

The broader environment stays uncertain. The IMF's managing director has cautioned that the energy crisis, elevated debt, and AI-related risks pose dangers to global expansion. The key issue for gold is whether these worries will manifest in bond markets as fiscal strain—the development Weston points to as the catalyst for a more sustained rebound.