【MACRO Alert】 The Middle East ceasefire agreement and the future of the gold market: the intertwined

According to the latest report from the AXIOS website, senior US officials revealed that Israel and Lebanon have reached an agreement on the terms of a ceasefire agreement, a development that is expected to end the conflict between the two sides and Hezbollah. Although the two sides have not yet officially announced it, the Israeli Security Cabinet is expected to approve the agreement on Tuesday. After the news came out, the spot gold price continued to fall, falling below $2,640, a sharp drop of more than $80 from the intraday high; WTI crude oil and Brent crude oil also fell by 2% at one point, showing the market's sensitive reaction to geopolitical tensions.

Earlier, Israeli officials had hinted that an agreement to end the fighting with Hezbollah could be finalized “within days” as US diplomats worked to broker a ceasefire. The proposed deal calls for an initial 60-day ceasefire, during which Israeli troops would withdraw from Lebanon and Hezbollah would transfer its weapons 30 kilometers north of the Litani River. The deal is based on UN Security Council Resolution 1701, which was intended to end the 2006 war but has not been fully implemented.

Under the proposal, the Lebanese army, with the support of UN peacekeepers, would take over southern areas evacuated by Israeli troops and Hezbollah. However, it is unclear whether Israel still insists on a written letter from Washington guaranteeing its right to attack Lebanon if threatened by Hezbollah. This uncertainty adds complexity to the prospects for peace in the Middle East.

Nitesh Shah, head of commodity and macroeconomic research at WisdomTree, expects gold's long-term upward trend to continue until 2025. He believes that factors such as the expansion of the US debt scale, the Federal Reserve's interest rate cut cycle, and the use of gold to replace the US dollar as a foreign exchange reserve will be beneficial to gold. Shah pointed out that Trump's policies may bring inflationary pressures while pushing up government debt, and the dollar is expected to weaken in 2025, which will become an important factor driving up gold prices.

On the other hand, Daniel Ghali, senior commodity strategist at TD Securities, has a different attitude towards the outlook for gold. He believes that gold bulls are showing signs of fatigue, and gold prices may have reached a top in the short term, while silver has a better advantage in further gains. Ghali pointed out that the recent decline in gold prices is related to the sell-off caused by the sharp reduction in macro funds, and the average magnitude of such retracements is between 7% and 10%.

Market participants are also watching the minutes of the Federal Reserve's November FOMC meeting, GDP data and the core PCE price index, which will be released this week. The market generally expects the Fed to cut interest rates by 25 basis points at its next meeting on December 18, although traders have reduced their bets on this outcome in recent days. According to the Chicago Mercantile Exchange's (CME) FedWatch tool, traders currently believe that there is a 56% probability that the Fed will cut interest rates by another 25 basis points in December. Giovanni said, “We still expect the Fed to cut interest rates by 25 basis points, but what is more important to the market is whether the dot plot shows a smaller rate cut next year.”

In addition, UBS analyst Giovanni Staunovo said that two factors dragging down gold prices included profit-taking after last week's strong rise in gold prices and Trump's nomination of Benson as the next U.S. Treasury Secretary. Some market participants believe that he will have less negative impact on the trade war because he understands the market and his appointment may reduce the possibility of the United States imposing high tariffs on trading partners.

Shah also believes that the trend of de-dollarization in global financial markets will continue to support gold prices. Although central bank gold purchases may slow down from recent years, Shah still expects central banks to continue to increase their gold reserves. Shah said Chinese buyers may re-enter the gold market.

“It's not a question of 'if' but 'when', and frankly, I don't think they can wait for lower prices any longer, because they may never... China's gold reserves are still relatively low compared to other foreign exchange assets. If they don't want to be controlled by other G7 economies, they need to increase their reserves.” In addition, Shah added that gold will continue to be an important safe-haven asset amid growing global uncertainty. In contrast, Gary believes that silver's liquidity configuration is clearly more advantageous. He pointed out that silver has more advantages in further gains, especially against the backdrop of global economic recovery and increased industrial demand.