The Financial Times reported earlier in the week that gold’s last quarter was the worst in more than a decade.
One reason that contributed to the fall was the expectation of higher interest rates from the new Federal Reserve (Fed) Chairman Kevin Warsh.
Those expectations might be a little different from today.
Bloomberg quotes him as saying:
“Expectations of inflation over the first four weeks of this period have come down, inflation risks have come down.”
Perhaps not quite as hawkish as originally presumed three months ago.
That’s notable because sentiment has turned badly against gold in recent times.
The Macro Charts service shows this chart in its most recent column:
Those blue boxes above are where sentiment plunged, only to turn up as the washout completed each time, then reversed.
Will the same happen this time?
Nobody knows the future. It’s possible.
Some data can help at a point like this.
The team at Macro Charts cite evidence that, since 1970, there have been 14 instances of gold falling more than 10% in a month.
Gold was higher two months later in 13 of those periods. The one loss was only 2.85%.
That’s a high-probability statistic, historically. It’s hard not to think that the risk versus reward is swinging back in favour of gold.
Anything else?
Analysts at research firm Porter & Co write:
“According to data compiled by SentimenTrader, sentiment among gold traders has dropped to levels only seen nine times in the last 18 years. And in each case, gold was higher one month later, with returns averaging 4.1%.
“The returns over the following year were also positive in 100% of prior cases, with an average gain of 16.6%. After a 30% decline, gold prices may have bottomed if the past is prologue.”
Again, history can tell us about what has happened, but nothing is guaranteed.
The Australian Financial Review reports this morning that the ‘debasement’ trade that drove the previous gold bull run has unwound.
It hasn’t just hit gold, either. The article says:
“Bitcoin has erased more than half its value from last year’s peak of above US$126,000 [$182,735]. Silver has also halved from its record above US$121 an ounce while gold has plunged nearly 30% from its all-time high of around US$5,600 an ounce.”
Like most reporting, that’s only telling us what has happened, and not what will happen from here.
The Fed can talk tough, but it still has to refinance a staggering level of US federal debt. This is known as the ‘maturity wall’. Between US$8 trillion and US$9.6 trillion in debt is due in 2026 and must be refinanced.
The US cannot afford to allow rates to go too high or the interest expense becomes ungovernable.
That means the Fed will most likely have to stay active in the market. The only question is to what extent.
This is important because it gives gold structural support as the money supply continually expands to accommodate this huge level of debt stock and upcoming flow.
Further context is important.
It’s no coincidence that gold fell heavily at the same time as the Iran war dislocated markets.
Energy spiked and put pressure on the inflation outlook. Both the Iran war and oil prices have fallen back from the acute phase. Nobody knows whether they will remain contained, but for today it’s fair to say the issues now are more supportive of gold than previously.
Then there’s the final kicker. Analyst Michael Howell continually shows that it’s not just the US that’s important for gold. China is too.
His latest analysis suggests that the People’s Bank of China is becoming active again. This should support gold as well going forward.
Considering all the factors above, the gold correction looks closer to finishing than starting.
Write to Callum Newman at Mining.com.au
Images: Unsplash & Macro Charts
