Gold and silver have had an exciting run in the past couple of months, and this is taking place exactly because precious metals are doing what they are supposed to do – act as a hedge against economic instability.

The price movements of precious metals are difficult for some people to understand. In the world of equities, investors are mesmerized by tickers day in and day out, and market movements occur minute by minute. In the world of gold and silver, however, investors buy and sell according to cycles that last years – oftentimes decades.

When a crisis is near, precious metals are heavily bought. The dollar becomes a secondary issue.

That’s exactly what has been happening with the yellow metal. Central banks have been piling up their gold reserves with an intention to reduce their dependence on the US dollar.

Gold has traded in a $50/oz. range during the week but is closing relatively unchanged over the last five days with a slightly bullish momentum helping to re-coup losses. Market volatility has again been driven by the US and China, with trade war rhetoric early in the week giving way to the liquidity measures and interest rate cut expectations as the weekends.

At the start of the week there were mildly positive noises around the ongoing US-China trade war with both sides agreeing to meet this month. While all ‘noise’ around the trade dispute should be treated with caution, any positive move would give the market a sharp risk-on boost and push the price of gold back below $1,500/oz. Risk-on was also given a nudge after Hong Kong chief executive Carrie Lam withdrew the contentious extradition bill that had fuelled months of street protests. While a positive, protests are expected to continue as Ms. Lam refuses to give in to the protesters other four demands.

Gold fell on Friday after hitting 6-year highs off $1557 per ounce earlier in the week as upbeat remarks from Federal Reserve Chair Jerome Powell offset a weaker-than-expected U.S. nonfarm payrolls report.

The end of the week saw monetary policy rear its head with China announcing a cut to its reserve ratio requirement (RRR), the third time this year. The measures should free up Chinese banks’ balance sheets to lend around another 800 billion Yuan (USD120 billion) to boost the economy, especially important as the US-China trade war rumbles on.

China trade headlines highlighted a contraction in exports, further decline in imports and narrowing surplus. If you look at these in the month-to- month terms, they are not nearly as bad as initial headlines suggest. Imports were up two months in a row.

Although traders are always on edge waiting for the next trade war headline, they’re leaning on the pillars of support from monetary policymakers as the expectation is running high for a significant monetary policy response by global central banks. Indeed, the ECB is expected to deliver a substantial policy package on Thursday while Federal Reserve Chairman Jerome Powell’s last speech before next week’s policy meeting cemented views for another Fed cut.

Prices are expected to remain relatively steady for the following reasons-

Trade war- Currently, the trade war has entered a new phase with the latest round of tariffs on both the US and Chinese sides. The trade war is not going to end until the crash runs its course. 

FED POLICY- the Fed’s policy decisions seem to be having little negative effect on metals prices going into autumn, and there doesn’t seem to be any indication that they plan to dramatically alter their current course of little to no rate reductions and no new stimulus.   While some people have noted the Fed has made some purchases of US treasuries in recent weeks, this does NOT represent true QE, as the Fed’s balance sheet continues to decline anyway as assets are cut.

BREXIT- If the Brexit decision culminates in a ‘No Deal’ exit from the EU (as I believe it eventually will), and then expect metals prices to skyrocket from that point on.   The next most obvious catalyst event for the global markets will surely be the Brexit. 

FED MEETING- the Fed meeting in September is widely expected to end with another interest rate cut. Every piece of evidence and Fed statement so far hints that the central bank will not cut dramatically, or, may not cut at all. If this is the case, then gold will spike again this month and in October. If the Fed does cut dramatically, expect a short term inflow of capital into equities and away from precious metals, then a rebound into late fall and early winter. A dramatic cut by the Fed would be an open admission that a recession is upon us, and though it would take some time for markets to digest, they will eventually come to the conclusion that a downturn is taking place and metals are one of the best options for protecting their savings

There are some downside risks in the next month, but these will be temporary. The US/China meeting in October could become yet another circus in which a “deal” is announced but nothing tangible in terms of a real agreement is ever produced. This could cause a short term drop in gold. Also, aggressive monetary devaluation by multiple nations, though not very likely at this time, could cause enough of a reactionary jump in the dollar index to slow gold’s ascent.

For now, prices are expected to remain relatively steady with a slight uptrend for perhaps another month or two, until October or November.