Commodities in general were down this morning, however, which dragged the gold price down to the $1,170 range. WTI crude and Brent crude were down 2.05% and 1.15%, respectively. Silver and platinum were each more than 1% lower this morning, while palladium lagged well behind, losing about 3%.
Even as the yellow metal sees consolidation after two weeks of solid gains, the metal has held up well in the face of selling pressure from traders taking profits. Moreover, there are several signs on the global markets that are supportive of gold continuing to track higher.
Factors Supporting Gold
There seems to be some positive momentum building for gold while investors as well as financial experts remain perplexed about the future of monetary policy around the world. So long as the Federal Reserve and the Bank of England continue to keep traders in the dark about where interest rates are going, market participants are going to shy away from taking any new positions or executing the big moves they may have planned in response to the first rate hike. In some ways, the Fed being stuck in neutral has had the same effect of freezing out the markets.
There are conflicting consequences for the gold price from this situation. Gold actually benefits from the near-zero interest rate environment because it means that the cost of storing or securing physical metal is cheaper. This benefit, however, has done little to make the yellow metal more attractive to investors.
Gold prices also usually hold up well during periods of deflation, which has been the case during this most recent rally. With inflation virtually nonexistent, the dollar has been softer of late. Thanks to its strong inverse correlation to the dollar, any softness in the Greenback is likely to be supportive of higher gold prices. The dollar was largely flat this morning, as well, at 94.9 on the DXY.
At the same time, however, volatility has fallen as the "frozen" markets putter through the doldrums. If the situation reverses once the supposedly imminent interest rate hikes come, it could be a positive development for gold as a hedge. It seems that the longer the central banks hold off on raising rates, the more uncertain the post-hike outlook becomes—and the more attractive gold becomes as a hedge.
With gold recently breaking above key technical levels, the bulls still to hold a short-term advantage. Several of the big banks have recently changed their tune on gold's future outlook, as well. HSBC is currently "cautiously bullish" on the yellow metal, calling for a price level of $1,205/oz by year's end.
Those keeping a close eye on China for clues about where gold is going are right to focus on the People's Republic. Gold imports to Hong Kong from Switzerland touched 18-month highs, as nearly 60 tonnes (over 1.9 million troy oz) were imported in September, up 65% month-over-month. Shanghai imported another 21.7 tonnes from the Swiss, a 6-month high. Many expect gold demand in China to remain strong even as the country's economy slows.
On top of that, major changes to the London gold bullion market, administered by the London Bullion Market Association (LBMA) and London Metals Exchange (LME), may allow the burgeoning Chinese gold market to gobble up some market share from London, traditionally the epicenter of the world gold trade. The LBMA has already seen its century-old process for how it sets (or "fixes") price benchmarks change in the past year. If China's plans for the Shanghai Gold Exchange to be globally recognized and conduct business denominated in yuan, we could see the People's Republic play an even larger role in price discovery.
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.