Gold's Line in the Sand
Last week, we asked whether markets had got ahead of themselves on a December interest rate rise. The data answered fairly bluntly. US inflation came in hotter than expected at 3.7%. Gold dipped below $4,100, then climbed back. And Fed Chair Kevin Warsh said very little on Friday, which markets took to mean rates will be left alone this month, with a rise still pencilled in for December.
This week, gold has barely left the room. It has been tested from both sides almost daily, with weaker US data nudging it up and rising oil pushing it back down. This morning it slipped below $4,100 once again, which raises a fair question. Has gold drawn its line in the sand?
Bad news, just not bad enough
On paper, this week started well for gold. The US housing market showed real strain, with pending home sales falling to their lowest level on record and new building well short of expectations. Higher borrowing costs are starting to bite.
Normally, that sort of news helps gold. A weaker economy makes it harder for the Federal Reserve to justify raising rates. This time, gold barely flinched. Markets have already settled on a pause in October, and a soft housing market isn't enough to outweigh last week's inflation figures. Inflation comes first. Everything else waits its turn.
Which brings us, as it so often does, to oil.
Oil keeps pulling the strings
The Strait of Hormuz is never far from the gold price. On Tuesday, attacks on ships in the Gulf and strikes on Saudi energy sites pushed oil to almost $112 a barrel. It fell back on reports that US-Iran talks might restart. Those reports were later disputed, and oil climbed again.
This morning, further attacks in Saudi Arabia sent oil higher once more, and gold fell by over 1%. The chain is a familiar one. Higher oil means higher inflation. Higher inflation means rates stay higher for longer. And higher rates weigh on a metal that pays no interest.
Worth noting: US government bond yields actually eased this week. Ordinarily, that would give gold a lift. It didn't, which tells you just how closely gold is watching oil right now.
Somebody keeps buying
And yet, each time gold has dipped, buyers have stepped back in.
Gold ETFs, funds that let investors hold gold through the stock market, now own more metal than at any point this year. In India, lower prices have tempted buyers back ahead of the festive and wedding season. So much so that some Indian fund providers have temporarily stopped taking new money into gold funds, widely seen as another attempt to limit imports.
Lower prices, it seems, are drawing people in rather than putting them off.
Debt doesn't take a week off
Step back from the day-to-day, and the bigger picture looks much as it did. Canadian bank CIBC cut its gold forecast for the rest of this year, citing higher rates and a stronger dollar. It still expects gold to average $5,200 next year, with central banks continuing to buy. BlackRock's Evy Hambro went a step further, pointing to rising government debt and suggesting that "the price of gold will reflect the pain elsewhere."
There was no shortage of pain this week. French government borrowing costs reached their highest level in over 20 years. UK inflation rose again in September. And Russia sold more of its gold to help fund a growing budget deficit.
So not every central bank is buying. But Russia isn't selling because it has lost faith in gold. It's selling because it needs the money. Which is rather the point.
What's left of the week
With the Fed in its quiet period, the data does the talking. Thursday brings US jobless claims, followed by business activity and consumer confidence figures on Friday.
If those numbers point to a slowing economy, gold may find firmer footing. If they hold up, and oil stays high, the case for higher rates gets stronger, and $4,100 comes under more pressure.
