Gold’s rally this year came to a halt in September. And the prices continued to weaken in October mainly due to higher US nominal and US real yields. The yellow metal fell from $1357 an ounce to $1260 on 6th October, thus signalling markets that the rally in gold prices has almost ended.
Post the decline, gold prices in October have stabilised. During the past week, gold prices declined by mid-week and then rose again on Thursday amid a weaker dollar and equity market sell-off, while market participants turned their attention to the European Central Bank’s (ECB) monetary policy meeting.
The spot gold price was quoted at $1,280.20-1,280.50 per oz, up $1.45 from the previous session’s close.
The decline in equities helped turn around a sell-off in the gold market, as investors pushed back into safe-haven assets. Moreover a simultaneous fall in the US dollar also pushed the demand for gold.
Even though gold prices rose on Thursday and Friday, the week ended on a negative note for gold. Gold prices were down for the second consecutive week with the precious metal off by .75% to trade at 1270 ahead of the New York close on Friday. The losses come amid continued strength in the U.S. Dollar as it gained due to a sharp sell-off in the Euro after a dovish ECB President Mario Draghi suggested that interest rates would likely remain at present levels for “an extended period of time” after the QE program ends.
The broader bid in the U.S. dollar as markets factor in a more hawkish Fed chairperson and with the Fed on track to hike the Fed funds rate by 25 bp in December also weighed on commodities in the past week.
Gold prices were under pressure and the other precious metals are following its lead – again the firmer dollar and potential for more dollar strength, while the geopolitical scene seems calm, are weighing on prices. Needless to say, North Korea also remains a potentially bullish factor.
Gold edged higher on Friday, reversing earlier losses after the Catalonian parliament’s independence declaration from Spain led investors to seek safety from political upheaval.
Catalonia’s declaration was in defiance of the Madrid government, which was preparing to impose direct rule over the region.
Bullion is often used as a safe haven in times of geopolitical and economic uncertainty, while riskier assets such as equities are generally sold off.
Though gold managed to reach a session high of$1271 per ounce, it couldn’t sustain the strengthening US dollar and hence headed for its second weekly decline.
However, markets are still bullish for gold as the yellow metal is expected to rise to $1,350 an ounce between January and March 2018, and end the year with a more positive performance, as rates are expected to average at $1,450 an ounce.
The longer-term trend in gold prices is also positive, mainly because we markets are negative on the US dollar.
Coming to this week, a decline in gold prices can be expected as gold is expected to weaken over a strong UD dollar.
Currently, all eyes fall on the Fed with the FOMC rate decision slated for Wednesday. While no change to the benchmark rate is expected, traders will be looking for any changes to the accompanying statement- specifically as it pertains to the inflationary outlook. Keep in mind markets have largely priced in a December hike with Fed Fund Futures currently showing an 87.1% probability for an increase of 25bps. However with both 3Q GDP and the Core Personal Consumption Expenditure (PCE) coming in stronger-than-expected on Friday, the question now becomes the future pace of subsequent rate-hikes.