Gold Market

Gold Market

In September, Gold lost 3.7% mainly during the last three days of the month. Gold’s challenging month is traced to an extensive run up in bond yields alongside a stronger dollar. The sell off at the end of the month was also likely the result of a strong adverse reaction to US economic data, a fall in the Chinese local premium and a negative technical breach.

With bond yields continuing to move higher alongside a still buoyant US economy, gold is likely to face continued turbulence over the next few weeks but there is not a material down trend being established as support remains from fragile equities, rising recession risk, inflation volatility and continued central bank interest in gold. This could represent a buying opportunity to some investors should the market become excessively short.

The gold price oscillated between US$1,900 and US$1,950 for most of September until a sharp dip on the 27th took the price to US$1,871 finish and a 3.7% m/m loss. A strong US dollar during the month led to more modest m/m drops in EUR, JPY, and GBP.

Bond yields continue to rage higher, as central banks, led by the Fed, are defiantly resisting a pivot soon, and higher supply chases reluctant demand. At the same time underlying economic conditions remain buoyant so a soft landing is still the consensus outcome. The cocktail of economic resilience and rising yields is likely to bring continued turbulence to gold. However, gold is more likely to experience choppiness than material weakness as support from several factors remains, including a poor risk reward for equities, rising recession risk over the next 6-12 months, inflation volatility and central bank buying.

Opportunity in gold from a short squeeze will continue to present itself from COMEX short positions at levels not seen since March 2023 and persistent ETF outflows. Yields, led by US Treasuries, are on the march.
The US 10-year TIPS yield, historically closely linked to gold, has breached 2.3% for the first time in 15 years.

This is territory that, combined with a rising US dollar, has previously proven to be challenging for gold. While August’s run-up in yields was probably driven as much by supply and demand as fundamentals, monetary policy is likely back in the driving seat and has been steadfastly hawkish over the past few weeks.

However, Gold is not the only casualty of soaring bond yields. Higher yields are depressing the equity risk premium and with rosy earnings growth forecasts. It is a set up reminiscent of late 2007. Yields are also further constricting financial conditions, which on some measures are also like 2007. This in turn could exacerbate recession risk over the next 6-12 months. Higher yields are also likely reflective of inflation volatility.

The inflation trend may be down, but is likely to be bumpy. In the US there are some things to watch:
-Alongside headline CPI, alternative measures of inflation climbed in August.
-Used car prices ticked up again and prolonged strikes by the auto workers union is a concern.
-Medical care services costs ticked up after falling almost every month for a year and are expected to rise again.
-Oil prices climbed towards US$100/bbl. and look susceptible to a geopolitically motivated stand-off.

Supply issues remain while demand is running at 2% higher than the pre-COVID level.

High inflation is painful but so is inflation volatility. It is both an economic concern and, historically, troublesome for equities.

Consequently, Gold is likely to face some choppiness over the next few weeks as rising real yields, a firmer US dollar and a buoyant economy batter some sectors of investment demand. But longer-term concerns and continued central bank buying should, ensure that this turbulence doesn’t establish a more material downtrend. As such, this could present potential gold buying opportunities for some investors. Historically, gold has tended to mean revert in instances when the market (futures positioning) becomes excessively short.

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