Gold still glitters, even after its shock slump overnight
There is also the “depreciation” trade, in which investors reduce their government bond holdings and exposure to fiat currencies because they fear their value will be eroded as the U.S. and other heavily indebted governments eventually have to deal with their debt burdens by printing more money. This is another macro reason to buy gold.
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At a more micro level, falling interest rates in the US (even as the inflation rate rises as the impact of Trump’s tariffs begin to take hold) have been a factor in the dollar’s selloff. Gold does not generate any income but carries both holding and opportunity costs for investors.
The decline in US interest rates (the yield on the benchmark 10-year US government bond fell from 4.78 percent to 3.96 percent as of mid-January) helped reduce gold holding costs, while the inflation rate jumped from 2.3 percent in April to 2.9 percent in August, thanks largely to Trump’s tariffs.
September inflation data was postponed due to the government shutdown in the United States, but is expected to be released on Friday. Market forecasts predict a further 3.1 percent rise, which would normally be positive for the gold price given bullion’s perceived role as a hedge against inflation.
However, there are other developments that will overshadow the announcement of inflation data.
Next week, the Federal Reserve Board meets with expectations that it will lower its policy rate for the second time this year; but this is not certain, especially if inflation is higher than expected.
Perhaps more importantly, there is also a scheduled meeting between Trump and Chinese President Xi Jinping on the sidelines of the Asia Pacific Economic Cooperation summit in South Korea, which begins Tuesday.
Trump’s initial reaction to China’s announcement that it would tighten controls on exports of rare earth elements and rare earth magnets was to angrily threaten to impose a 100 percent tariff on all U.S. imports from China.
But he backtracked almost immediately, adopting a conciliatory tone and starting to talk about the “really great” deal he hoped to negotiate with Xi — “which will be great for both countries and great for the whole world.”
China’s dominance of rare earths, vital for state-of-the-art manufacturing and weapons, means that Xi will enter any trade discussions holding Trump’s much stronger hand, despite Trump’s over-the-top talk of America’s strengths.
The optimistic expectation of a trade agreement that will reduce tensions between the world’s two key economies is a negative development for gold prices.
Gold thrives in environments of fear, uncertainty and volatility. It’s instructive that Wall Street’s so-called “fear index” — the VIX index — which measures market volatility suddenly rose in response to China’s new rare earth export rules and a sudden rise in trade tensions, then fell as Trump began making more soothing noises.
Another possible component that helped trigger the sharp decline in gold prices is the effects of the US shutdown, which affected more than just inflation data.
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With much economic and financial data unable to be collected due to workers being furloughed and agencies effectively shut down, commodity traders have lost access to the Commodity Futures Trading Commission’s weekly report, which provides insight into how hedge funds and other institutional investors are positioned in gold and silver futures.
They operate in an information vacuum that makes investors nervous and defensive. Considering how far and how fast gold and silver prices have risen (the gold price is up nearly $1,000 per ounce in less than two months), it’s no surprise that some traders have decided to reduce their exposure.
However, the fundamentals of gold and other precious metals remain solid.
Although the global economy has performed better than expected in the face of Trump’s trade wars, their full impact will not be seen until next year.
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US and global debt levels remain extremely high and are still rising.
Geopolitical tensions may or may not abate, but they will not disappear.
Central banks will continue to increase gold holdings as a strategy to move away from dollar-denominated assets, and central banks and governments will seek new trading partners and new currencies to trade after Trump made clear that historical relationships and institutions are no longer important to the United States.
The US inflation rate is likely to continue rising, albeit temporarily, and deficits and debt levels will also continue to rise.
Political dysfunction will continue, not only in America but also in other major developed economies.
Gold may have given back a very small portion of its gains this year, but it has not lost its shine. Many of the key factors driving these gains remain.
The Market Summary newsletter is a summary of the day’s transactions. Let’s each take ittoday afternoon.
