Yahoo Finance Gold price drop bellwether for inflation sentiment
Commodities round-up
Gold (GC=F) appeared more stable on Friday afternoon after it plunged on the back of rising bond yields this week with investors remaining mindful that the US Federal Reserve is likely to keep interest rates higher for longer.
Meanwhile, oil prices reversed losses with both Brent and US crude trading higher per barrel despite OPEC+ members this week opting to keep its current output policy unchanged.
At the time of writing, US crude oil, or West Texas Intermediate (CL=F), rose 0.34% to trade at $82.59 a barrel, while Brent crude (BZ=F) gained 0.39% to trade at $84.40. Meanwhile, gold was (GC=F) up 0.23% to $1,836.00 per ounce.
Gold
Since Wednesday 20 September, the price of gold has declined about 5.69% — this was the date that the US Federal Reserve Open Markets Committee (FOMC) announced that it would hold interest rates steady.
However, the Fed also indicated it is prepared to raise rates before the end of the year if necessary.
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Essentially, if inflation remains too high, investors may buy more gold and other precious metals to preserve the purchasing power of their dollars as gold is often seen as a safe-haven asset, although this is not a guarantee.
This week, gold has been trading sideways in a range of between $1,812 to $1,841 as US jobless claims remained at historically low levels.
Independent macro analyst Piero Cingari said: “Gold is an asset that tends to perform well during periods of stagflation, characterised by low economic growth and sustained inflation.
"However, the current economic situation cannot yet be classified as stagflation. According to estimates from the Federal Reserve Bank of Atlanta, the US GDP is expected to grow by 4.9% in the third quarter.
"In such a robust economic environment with inflation still running above the target, it allows the Federal Reserve to maintain a tight monetary policy.”
It seems that the Fed intends to keep interest rates high for an extended period and remains open to the possibility of further rate hikes.
“This policy stance encourages the rise in yields on treasury bonds. When risk-free interest rates increase, the appeal of assets like gold, which do not generate consistent income, tends to diminish,” Cingari said.
The 10-year real rate, calculated as the difference between the 10-year treasury bond yield and 10-year inflation expectations, is currently at its highest level in 20 years, standing above 2.4%.
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“This elevated rate also bolsters the strength of the US dollar, which further weighs on the price of gold," he said.
“To witness a significant rally in the price of gold, it would be necessary to observe a noticeable economic slowdown and a cooling job market, which could prompt the Federal Reserve to adopt a less hawkish stance than it currently maintains. Another potential bullish factor for gold is an increase in corporate default rates, as gold traditionally serves as a safe haven asset during times of economic distress,” he added.
Meanwhile, Simon Popple of Brookville Capital said: “Whilst inflation is an important driver of the gold price, it’s not the only one. As you can see from this chart, increasing debt (over time) seems to have led to a higher gold price,” he told Yahoo Finance UK.
Oil
Meanwhile, oil was trading higher on Friday but remains on track for its biggest weekly drop since March.
“Oil prices appear to be steadying a little after plunging in the middle of this week. The market was already looking a little overbought and the most recent peak lacked momentum which suggested the cracks were appearing. The sell-off though coincided with the OPEC+ meeting despite no changes being announced,” Craig Erlam, market analyst at OANDA, said.
The lack of update on crude cuts from OPEC+ may have contributed to the move, with Saudi Arabia and Russia in particular opting not to commit to extending their voluntary cuts beyond the end of the year.
“They may still do so but clearly with oil at these levels and demand at risk of softening, markets are now positioning for those restrictions in particular expiring in a couple of months,” Erlam said.
He also noted if China’s outlook continues to improve, we could see a return back to the $90 a barrel level.
“OPEC+ worked hard to get oil back to $90 a barrel and they will likely continue to do whatever it takes to make sure we don’t see prices return to the lows of the year, which is around the $70 level,” Erlam added.
Meanwhile, Dr Yousef M Alshammari, chief executive and head of oil research at CMarkits, there has been volatility in the oil markets in the run up to the OPEC+ meeting with Brent dropping by almost $12 as traders became more concerned about the demand picture and rising supplies particularly from the US, Iran Libya and other countries.
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“That means it is in the interest of OPEC+ to delay any easing any cuts until they have clarity on the state of the world economy, particularly in major consuming countries like the US, and the EU,” he told Yahoo Finance UK.
Alshammari said there could be further cuts in the months ahead if prices keep falling, particularly from Russia and other producers in the alliance.
“But the confirmed outcome is that voluntary cuts from Saudi and Russia are to stay till end of Dec 2023,” he added.
Oil price likely to reach $100?
Oil analyst and economist for Primary Vision Network Osama Rizvi said: “My bearish case builds on many global economic indicators that blatantly call for an imminent recession.
"European economy likely contracted in Q3. The Composite PMI index nudged up a bit, 47 but still down from 50, indicating contraction. This is bolstered by declining outputs in both services and the manufacturing sector.
“China's economic indicators have also not been very promising. Global PMI is still below 50. The chances of higher for longer interest rate regime are more likely than a global unwinding of monetary policy tightening. US Fed has confirmed another hike before end of the year,” he added.
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Rizvi also noted that data from Taiwan, South Korea and Japan also show low exports and core inflation remaining higher than the targets (especially in case of Japan).
“As such, there are multiple bearish indicators and I think the prices rallied only because of a perception of prolonged oil market tightness due to continued pledges by OPEC+. These will be tested in the coming months as global economic activity takes a drag and might tempt Russia to back off from its cooperation in production cuts,” he added.
However, with the US hurricane season pending, Rizvi said $100 oil is not off the cards.
Silver
Meanwhile, the price of silver (SI=F) was up 0.93% to $21.22 per troy ounce on the COMEX. However, the precious metal remains in a familiar range held over the past few days.
Analysts are of the view that current robust demand from the solar industry and limited supply growth from mines will buoy silver prices once the period of higher global interest rates is over.
In addition to interest rate jitters, silver has also been impacted by higher bond yields and a stronger US dollar, capping any price jumps.
According to Trading Economics global macro models and analysts expectations, silver is expected to trade at $22.65 by the end of this quarter — and it estimates silver to trade at $24.19 in 12 months time.
Platinum
The price of platinum (PL=F) also rose on Friday, gaining 0.63% to $888.60 in afternoon trade. However, the precious metal tested new lows this week as commodity markets more widely pulled back.
Traders are concerned about an economic slowdown, which could reduce demand for platinum, which has been reflected in the price volatility of all commodities this week.
For the year, the World Platinum Investment Council has forecast the platinum market to hit a deficit of over a million ounces, with demand jumping by 27% on an annual basis with supply remaining flat.
Platinum is expected to trade at $924.18 by the end of this quarter, according to Trading Economics global macro models and analysts expectations.
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