Cash Is King and Gold Is Suffering — But Longer-Term Outlook Is Robust
By: Bart Melek
Oct. 10, 2023 - 2 minutes
Gold prices have fallen sharply over the last couple of weeks as rising interest rates along the yield curve aggressively lifted the cost of carry and opportunity costs to hold the yellow metal. The unexpectedly firm USD is also contributing to the weakness. After trading sideways for most of the year thanks to repeated dip-buying, the recent convincing drop below U$1,900/oz has been driven by the Federal Reserve's message that it will keep policy tight for a long period. Continued firm U.S. economic data and a surge in crude oil prices have made the Fed's hawkish narrative very credible which could see the FOMC dot projections come true.
Discretionary trader CTA funds are selling in order to adjust positioning which is serving as a downside catalyst. There are also steady sales by exchange-traded funds backed by the metal which has accelerated recently.
The Fed's higher-rates-for-longer narrative, the fear that surging energy costs will leak into core inflation and a resilient U.S. economy are prompting us to worry that there is still more downside. Given positioning, technical and energy price pressures, it would not be surprising to see gold drop into low U$1,800s if inflation moves higher and economic data remains firm.
While risks are very much to the downside in the near-term, our outlook is positive longer-term. The Fed will aggressively pivot toward the dovish side in the first half of 2024 as the U.S. economy enters a possible recession and price pressures wane. It should be remembered that this Fed Chair and team tend to gear policy to do the least harm to the lowest income groups. As such, they are fighting inflation with high rates now as they believe inflation is most harmful to those cohorts. Once the economy slows and unemployment increases, they will likely conclude that those groups will be harmed most and pivot to the dovish side of policy.
With that, carry, opportunity costs and the USD should all drift lower driving investors into gold again. Plus, Chinese demand is strong as is central bank and investor physical buying. We expect gold to trade in the U$2,100s in the first half of next year.
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Global Head of Commodity Markets Strategy, TD Securities
Global Head of Commodity Markets Strategy, TD Securities
Global Head of Commodity Markets Strategy, TD Securities
