Gold’s Not Going Anywhere, No Matter What Happens Next

Last night, gold futures came within touching distance of $2,000, touching $1,998.60 and closed at $1,994.40. This move towards the key psychological level was especially impressive given US dollar strength during the day. Short-term strength of both assets is likely to be on the back of safe haven demand in the Middle East. 

Gold’s tear may have let up somewhat on account of US housing data performing better than expected as well as some diplomatic efforts in the Middle East starting to show some progress. 

Look out today and tomorrow for two key reports out of the US, which may also put pressure on gold. Third quarter GDP data will be released today at 8:30 AM EDT. And tomorrow look out for the most recent inflation statistics from the BEA (Bureau of Economic Analysis) as well as the September PCE (Personal Consumption Expenditure Price Index). Both of these will likely impact which way the FOMC will go next week. 

Currently, the common view of the FOMC is that they will hold rates where they are, however today and tomorrow’s releases could determine whether another hike is coming this year. 

China in a panic?

Is it because of efforts to support its currency or geopolitical tensions? Or both? Who knows but US Treasury data shows that China has been selling off pretty chunky amounts of US assets. And where are they putting the proceeds? Well, who knows really but it’s interesting that both the PBOC’s and private investors’ gold demand has picked up pace across the same period that China has been selling off US Treasuries. 

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This isn’t the only action China has taken to shore up its economy of late. On Tuesday the government announced plans to issue additional sovereign debt worth 1 trillion yuan. This will send the deficit to a three-year high. The decision to flood the market is more notable in what it says about the PBOC’s and governments concerns about the health of the economy, than the move itself. 

Expect to see more aggressive moves from China as it works hard to steady the economy’s collapse towards a soft landing. 

Watch this space

Right now if you come across a mainstream article about the gold price and its recent performance then it will likely point to the ongoing atrocities in the Middle East as the main driver behind gold’s strength. Whilst we don’t disagree that the geopolitical risk premium is playing its part, it is quite short sighted and we don’t expect this to be a long-lived scenario. 

It’s too easy for the mainstream to forget that gold had been strong prior to the attacks by Hamas on Israel, and the ensuing retaliation. This is, as we have said frequently, because positive sentiment towards monetary decisions and the strength of the global economy is very weak at present. Very few people believe that the likes of the FOMC and governments have got any kind of recovery in their midst. Any decision by government or monetary policy committees is about making the best of a bad situation, and coping, not about paying down debt and bringing value back to currencies. 

Gold Down $100? This Really Shouldn’t Be A Surprise

Of course, events in the Middle East and the actions of the US Federal Reserve are not completely disconnected. How the war will develop and to what extent it envelops the rest of the region and its allies will be very much a factor when the FOMC is considering whether or not to hike rates. But we’re not convinced that gold is so reliant on interest rate data. 

If you google something along the lines of “gold and interest rate relationship” then you will almost certainly see a search response along the lines of: “the relationship between gold and interest rates is traditionally an inverse one” or “gold and interest rates are negatively correlated.”

But, right now. This simply isn’t the case. Interest rates are surging and gold is giving them the proverbial middle finger. 

More on this next week. 

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