The gold price briefly sank to a 3-week low in overnight trading as the gold market attempts to establish new support levels. The metal fell below the $1,150/oz mark as the week winds down on renewed expectations of a December rate hike from the Federal Reserve.
While investors with a long-term outlook continue to hold gold as safe-haven insurance against another potential financial meltdown, the speculative gold market has shifted slightly back into the hands of the bearish camp. While permabears will always take a negative view of gold relative to riskier assets, there also appears to be some bearish activity from traders who (against all reason) take the Fed at its word about the imminent tightening of monetary policy.
By once again wresting control of the gold trade after a solid mulit-week rally, the bears have the near-term advantage in the market. The shift in momentum toward interest rates going up at the next FOMC meeting in December has a dubious ring to it, however, given that the Fed governors have been hinting at such a move for over a year. Of course, even with all of this official hemming and hawing, a rate hike has yet to materialize thus far in 2015.
No matter what the Fed chooses to signal to the broader markets, some of the underlying factors that have prevented a rate increase thus far are actually supportive of a more bullish gold market. Here are a few examples:
Although we've yet to see any economic data as poor as the "summer swoon" that sent the Dow Industrials more than 1,000 points lower over the course of two trading days, the U.S. economy has still been mired in mediocrity. Just because the U.S. has relatively outperformed its international peers doesn't mean economic conditions are anything but mediocre.
The latest consumer spending numbers from September were below expectations, registering just 0.1% growth after gaining 0.4% in August. This was no doubt influenced by the weakest wage growth in 6 months, a commensurate 0.1% uptick. It was also a far cry from the 3.2% increase in spending during the second quarter.
Consumer sentiment also slowed in October according to the University of Michigan Consumer Comfort index. The index rose less than expected and reflected less optimism about the economy among U.S. consumers. Q3 GDP was reported at 1.5% on Thursday, slightly short of analysts' expectations and less than half the 3.9% expansion witnessed during the previous quarter.
While this backdrop is broadly favorable for gold prices, the markets are feeling a bit better after the Senate approved a budget deal brokered between the White House and House Republicans. This news could also temporarily weigh on the precious metals. The agreement helps avoid a default on U.S. debt by extending the government's borrowing authority beyond the end of Obama's second term.
The International Picture
Outside of the U.S., the picture is much shakier. The Bank of Japan held off on issuing more monetary stimulus, somewhat to the surprise of observers. Nonetheless, persistently low inflation in Asia and Europe will likely prompt other central banks (the PBoC and the ECB, among others) to eventually ramp up their stimulus measures in the near future. As an illustration, Eurozone inflation actually rose to 0.0% after hitting -0.1% last month. What's more, even with a stronger dollar holding down gold prices in USD, a weaker euro, yuan, ruble, and Australian dollar are actually helping lift gold priced in those currencies. With no signs that these factors will abate anytime soon, the macro view for gold remains more compelling than the short-term outlook.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.