Last week, the World Gold Council (WGC) released a market update entitled “Price drop likely to spur demand”. What are the main conclusions of the report?
After the price of gold fell about 3 percent on October 4, the WGC published a market update which argues that the price drop is likely to spur demand for gold:
Looking forward, we believe the price dip will offer a good buying opportunity for consumers and long-term investors (…) We believe that consumers and investors may see the price decline as a good buying opportunity, as many have been waiting for a price pull-back before entering the Market (...) Anecdotal evidence suggests that consumers had been holding off purchases in previous months, so this may well trigger an increase in demand.
Well, not exactly. Surely, price drops may be a great buying opportunity. But not all of them. Investors should remember that the WGC suffers from a bullish bias, since it is the market development organization for the gold industry. So yeah, gold prices fell 3 percent, but it does not matter, folks, since it is only temporary and “the broader market environment remains generally positive for gold”. It’s even good news since it created buying opportunity. Although we agree that low and negative interest rates and continuing elevated uncertainty are fundamentally positive for the gold market, one cannot simply abstract from the ongoing changes in the economic outlook. As one can see in the chart below, the U.S. dollar strengthened about 2 percent against the Euro over the last ten days.
Chart 1: The EUR/USD exchange rate over the last ten days.
And the real interest rates also increased in October. The yield on 10-year inflation-indexed Treasuries rose from 0 to 0.15 percent, as the chart below shows. Therefore, real interest rates remain low, but what really counts for the gold market is not the level of the U.S. dollar or interest rates, but their dynamics.
Chart 2: Real interest rates (10-year inflation-indexed Treasuries) over the last year.
Summing up, the WGC released the new market update which downplays the recent price drop and argues that it is likely to spur demand for gold. We do not buy it. Surely, consumers may increase their purchases, but it is not what drives the price of gold. What really matters is investment demand. And although the long-term investment case for gold remains solid, gold prices are likely to remain under downward pressure in the near future amid elevated expectations that the Fed will raise interest rates in December.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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