Gold down Again, but We’re Betting on a Rebound

Gold Chart 4

Last week was another wild one for gold.

What can we make of it?

Do we even need to make anything of it?

We’ll give you our take below…

Remember one thing about markets, if you remember nothing else: Markets move up and down all the time.

In recent days, we’ve seen a lot of press stories about volatile stocks and, especially, volatile gold.

The mainstream media hates gold. We don’t know why for sure. We think it’s because they don’t understand it. So when the price moves up and down, they make a big deal out of it.

But here’s the thing, sure, the gold price is down 4% in the past three days. But year-to-date, it’s still up 18.3%. Compare that to the Aussie market’s 3.5% year-to-date rise.

So what do we make of it? Not much at all. Here’s why…

Two more months of the same

Gold is volatile for one reason. Investors remain infatuated with the next US Federal Reserve interest rate decision.

The Fed next meets in November. Investors don’t believe the Fed will do anything at that meeting.

The following meeting for the Fed is in December. Investors do think the Fed will do something at that meeting.

They think the Fed will raise interest rates by 0.25%.

But just as markets don’t move in a straight line, expectations don’t move in a straight line, either.

What’s more, when it comes to market action, two months is a long time to wait. Anything can happen.

You know what that means. That’s right, expect more ups and downs.

But why do the markets think rates will rise in December? This note from Bloomberg gives you a clue:

Bond traders bolstered their bets on higher U.S. interest rates after data showed filings for unemployment benefits dropped to an almost four-decade low, coming after reports pointing to an improvement in the services and manufacturing industries. While Friday’s payrolls data is forecast to reinforce that picture, investors will keep a close eye on any substantial increase in wages. Movement in salaries is seen as a leading indicator of inflation, which is firmly on investors’ radars after the recent recovery in oil prices.

U.S. employers added 172,000 jobs in September, according to estimates in a Bloomberg survey, an increase from a three-month low reached in August. A Bloomberg index tracking economic surprises in the U.S. turned positive Wednesday for the first time since August, meaning that more reports are beating forecasts.

That settles it, right? Maybe…but maybe not.

We’re backing a rebound for gold

When looking at any economic data, you have to consider the factors behind the data.

In both instances — jobs numbers and economic estimates — there is a big element of human emotion.

We’ll give you an example. Today, the market has priced in a 63.6% chance of the Fed raising rates in December. But that wasn’t the market expectation when employers made decisions on adding jobs, or when analysts made their economic forecasts.

Back in August, the market thought there was a 46.7% chance of a December rate rise. In July, the market thought there was a 7.9% of a December rate rise.

The point is, market players made decisions one or two months ago based on interest rates staying where they are. The interesting thing now is how individuals and businesses will react over the next two months, now the chances of a rate rise are much higher.

In our view, individuals and businesses won’t take kindly to it at all. Jobs and economic forecasts will fall short of expectations, and as they do, the chances of a rate rise will fall, and all else being equal, gold will rise.

It may be foolhardy, but we still consider the recent gold price slump as a buying rather than a selling opportunity.


Kris Sayce,
For The Daily Reckoning

PS: Buy or sell…or hold. We have our view, but controversial economist Phil Anderson says that personal views don’t matter. The only thing that matters is the Grand Cycle. What’s that all about? For details, go here.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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