• Equity investors are hedging their risks by selling the precious metal.
• Falling oil prices, Treasury yields and the US dollar will help gold.
Gold has been attempting to recover over the last couple of days amid diminishing prospects of an interest rate hike in October and signs of a slowdown in the US economy. A fall in consumer confidence to a 12-year low and a decline in job vacancies are raising doubts about whether the US economy can withstand high interest rates. This is all the more so as the Treasury yield curve is approaching inversion, which is seen as a harbinger of recession.
The market had all but priced in a second consecutive Fed rate rise, which was the main reason for gold’s plunge to its lowest level since early August. However, a speech by John Williams, President of the New York Fed, on the need to await further data reduced the likelihood of a policy tightening in October from 73% to 46%. This allowed gold to rebound from levels just above $4,100, rising above $4,200 by midday on Wednesday.
Earlier, pressure on the precious metal had come from a break below a key technical support level, profit-taking by Chinese traders ahead of the holidays, and a sharp rally in Treasury yields and the US dollar.
Nevertheless, the inflow of 63 tonnes into ETFs in September suggests that demand for gold remains strong. The trends in the holdings of specialised exchange-traded funds and physical gold are diverging, signalling sustained interest in bullion from investors who are concerned about the prospects for public finances in the world’s largest economies, which have been borrowing at the highest interest rates seen in many years and decades, whilst also facing extremely high debt-to-GDP ratios and chronic budget deficits.
Signs of a cooling US economy, coupled with easing fears over oil supplies, could lead to a fall in Treasury yields and a weakening of the dollar. This would create a favourable backdrop for gold, which does not generate interest income and is denominated in US dollars.
This scenario is becoming the baseline and justifies buying into dips in gold. However, it is necessary to take into account the risks of escalation in the Middle East from a cornered Iran.
The FxPro Analyst Team