Will the Fall in the Gold Price Last?

Will the Fall in the Gold Price Last?

The final trading day of last week turned out to be more interesting than originally thought.

Of course, it all unfolded while Australians were sleeping.

As expected, the Federal Reserve Bank raised the rate to 2% on Wednesday, 13 June, and told the markets to expect another two rate hikes later this year.

That same day, The Economic Times in India were placing bets that the gold bullion price was about to rally.

Come Friday, 15 June, the price of gold fell US$25 per ounce.

No one saw it coming.

Thirty-six hours after the Fed raised rates, the price of gold plunged in morning trade in the US.

Take a look:

24-hour spot gold on 15 June 2018

Source: Kitco

Since then, analysts have been scrambling to figure out what happened.

Quite frankly, the series of events leading to gold’s fall is odd, but there is an answer.

Shortly after the Fed announcement on Wednesday evening, gold rallied 0.6% during the London trading session. Gold showed no signs of wobbling during Thursday US trade.

The blue line on the chart above shows that gold did very little during the London Thursday night session, which was between midnight and 8:00am New York time.

As Americans sipped their giant lattes, around 8:00am Friday, 15 June, the gold price plunged US$10 in the first hour and proceeded to trade all the way down to US$1,275 by 2:00pm.

Erasing all of 2018’s price gains in a few hours.

What was the trigger?

That same day, Trump announced he will be whacking a 25% tariff on some US$50 billion worth of Chinese imports under the guise of intellectual property theft. China retaliated with a 25% tariff on 659 US products worth the same amount.

Some have said that this tariff one-upmanship drove gold lower.

But Trump’s unofficial trade war play came after the price of gold had fallen. And geopolitical tensions generally support the gold price.

Not only that, the gold price plunge came almost two days after the Fed confirmed it would allow inflation in the US to run a little higher, for longer. On Wednesday evening, it told the markets it would tolerate inflation above the target rate at least through to 2020.

That’s another two years of currency devaluation from the Fed folks. Another two years of inflation eroding the purchasing power of the greenback.

Higher inflation and higher rates are normally something that keeps the gold price moving steadily up, yet gold still plunged even though the market knew this.

There are some analysts pointing to a drop in physical demand. Although it’s likely to be temporary.

India, the world’s second largest buyer of physical gold, saw demand drop 39% for May, which was the fifth monthly drop in a row.

However, India’s falling gold demand isn’t fresh news. The May decline has been well known for at least two weeks.

The key to gold’s sudden price decline may be found over in Europe.

Late Thursday evening, the European Central Bank confirmed that it will end its quantitative easing (QE) program in December this year, but will leave the cash rate at a record low of 0.25% until at least mid-2019.

This announcement began gold’s price decline.

This confirmation of ending QE, and the low cash rate for longer, weakened the euro to the US dollar.

Knowing there are two more rate hikes to come, the US dollar rallied, around 7:00pm Thursday night US time.

A higher interest rate in a stable and developed economy is what foreign investors look for. It means they are more likely to invest in a country offering the higher return on their money.

Gold and the US dollar have an inverse relationship. In short, a high gold price reflects a weaker US dollar.

So, the late Thursday night rally in the US dollar meant investors began moving out of gold early Friday morning.

However, I’ll just add that the delay between the US dollar rally and the gold price fall is about 12 hours. It wasn’t the European market that began the gold price selloff, but rather the US market. This is highly unusual, and makes me suspect there was something else driving this. It could be that in the coming weeks, we will discover a large amount of physical bullion was sold, driving the gold price down.

My suspicions aside, where to next for gold?

I’m not entirely sure the worst falls are over.

For those into technical patterns on charts, there’s every chance gold will go lower in the next few weeks. The spot price currently sits at US$1,280 per ounce. There’s a strong possibility that if gold breaks through US$1,270, we will get gold back in the US$1,250-55 range shortly after.

But don’t expect it to last long.

There’s too much happening in the broader economy to kept investors out of the metal. And US$1,250 gold looks cheap.

There’ll likely be some bumpy trading sessions ahead for gold, possibly until the end of August.

Once that’s over, gold could potentially once again push through US$1,300 and go above US$1,400 by the end of the year.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia