Gold Down But Not Out

Gold and silver continue on their downward trajectory this week. The US Government Shutdown Deal and comments from FOMC members appear to have boosted bets that the Fed will make space for one more hike in 2023. 

Prior to the last-minute debt-ceiling deal (yawn) being struck at the weekend, markets had favoured a December hike, as the next one to expect. This was because there had been an assumption that the US government would be shut down in November, when the FOMC is next due to meet. 

However, Saturday night culminated in a deal being struck to extend government funding for the next six weeks and this prompted markets to price in a hike next month, putting further pressure on the gold price sending it to 8-month lows and the gold/silver ratio to 8-week highs. 

It’s worth noting here that a ‘last minute deal’ was not a last minute deal to solve the US government’s financial problems. It was a last minute deal to keep kicking the can down the road. Just to delay the inevitable. It’s like when your kids want to keep playing out as it’s getting dark but it’s bedtime. They whine and plead to be allowed to stay out, you relent but everyone knows that ultimately it’ll soon be lights out and no one will be out playing anymore. It’s the same story here, markets and politicians have just bought some more time to make deals, not to actually fix anything. 

Gold’s standing firm

In recent months gold’s performance has been somewhat subdued thanks to the performance of US Treasury yields which recently hit a 16 year high. However, a recent pullback has also pulled the dollar away from sunnier heights. We seem to be in a spot where traders don’t want to show too much interest in gold or the dollar, until they feel more confident about where the FOMC will go next. Gold is still buzzing above what seems to be a significant support zone around $1,810. 

In case you missed it, have a listen to my interview with Chris Vermeulen, recorded on Tuesday. For him this retraction in the gold price is totally expected. 

This week, keep an eye out tomorrow for the ever-popular US employment data, released at the end of each month. The Non Farm Payrolls (NFP) will no doubt influence both where the FOMC next decides to put interest rates and demand for the US Dollar. 

If US labour data positively surprises then we will likely see more support for US Treasury yields, and further declines in the gold price. But data releases such as these will just have a short-term impact, ultimately markets are going to be focussed on interest rates and how hawkish the FOMC is expected to be. 

Don’t forget about the other half of the gold market

But, we’re only telling one side of the story. To only talk about gold against the US dollar backdrop and all of the hype that surrounds it is to do it a disservice. And to do a disservice to those who buy gold because it is gold, rather than because of how the US dollar, or US Treasury yields may or may not be performing on a particular day. 

We are of course referring to the impact the Asia trade (mainly China) is having on the gold price, and the strength it is giving it. Interestingly gold made some modest gains overnight during the Asian trading session but then promptly fell back.  We say interestingly because it is becoming increasingly clear that gold trading activities in ‘the East’ are finally revealing the true demand and sentiment certain economies hold for gold. 

As I explained last week, gold has been undergoing a ‘conscious uncoupling’. For years a key driver for the gold price has been real rates, but in the last year or so, this relationship has begun to break down. When this began to break down there was a lot going on – inflation, war to name a few. So, for a while it could have been described as temporary – transitory, perhaps (to steal a favourite phrase of central bankers). But as the last year has gone on it is clear that Western markets no longer have the same influence over the gold price as they once did.   

Gold holds up when the economy won’t any longer. See China and recent announcements from Japan to appreciate just how shaky things are looking there. Gold is the proverbial canary in the gold mine, and that canary’s voice is getting louder and more people are singing along.

Are Alcoholics Anonymous Sponsoring Inflation?

And finally, did you hear the one about how inflation got everyone to sober up? Incrementum, the authors of the wonderful In Gold We Trust Report release a much-celebrated gold/beer ratio, every year. Just in time to make those enjoying Oktoberfest feel really good about their spending…