Since Oct. 8, gold has gained more than $40, jumping on Thursday to its highest in more than three months. Are we witnessing a great comeback of gold, which will end the bear market?

Gold came back into favor. Despite a slight correction on Friday due to profit taking, the shiny metal just erased its 2015 losses. Amid the recent price increases, gold ETFs saw a surge in holdings (412,000 ounces in just two days), which signals an improved sentiment in the gold market.

Why did many gold bulls return to the market? Well, the lack of action at the FOMC September meeting, weak U.S. economic data (disappointing September non-farm payroll report or stagnating inflation and retail sales) and dovish statements of the Fed officials damped expectations that central bankers would raise interest rates this year. So, investors changed their perception that U.S. economic growth is stronger than the rest of the world and, thus, the U.S. central bank could tighten its monetary policy and diverge from the Bank of Japan and European Central Bank’s easing.

But the U.S. economy, even though it still performs better than many other countries, does not experience impressive economic growth. Actually, the current expansion is the slowest in the U.S. history, and forecasts for real GDP growth in the third quarter stand at less than 1 percent. Thus, the “U.S. decoupling” narrative simply does not hold, especially with very weak manufacturing and declines in the S&P 500. In consequence, the investors’ expectations for the first Fed hike shifted to March 2016. This is likely the reason behind the U.S. dollar’s decline this month (together with real interest rates). The price of gold went up at the same time.

The bottom line is that the price of gold has recently gained significantly due to improved fundamental factors. Reduced expectations of a Fed hike this year led to a weaker U.S. dollar and declines in real interest rates. If this trend in the greenback and real interest rates continues, then we could even see higher gold prices in the following days. However, given that the gold trade is generally about the Fed, any stronger hawkish signals from the U.S. central bank could change the sentiment in the gold market again.

Gold rallied this month – it’s a fact. However, there was a good reason for it in the form of a change in the expectations regarding an interest rate increase. Therefore, it doesn’t imply a lasting change in the investors’ approach toward gold – it’s simply a reply to the new information that was likely largely based on a surprisingly bad jobs report released earlier this month. Consequently, it could very well be the case that what was about to happen based on the changed expectations has already happened and any negative (for gold) comments from the Fed would result in a sharp drop of the price of gold. Therefore, taking into account the fundamental changes alone, it’s much too early to say that the bear market has ended or that its end is near.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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