It’s said that everything that goes up, must come down. But, it seems that the fundamentals are lining up for gold to break the laws of physics. There is no guarantee that gold will launch into orbit, and an upward trend will certainly have reversals along the way. But, the latest developments seem to give traders plenty of confidence, with gold scoring a new record high after Fed Chair Jerome Powell spoke on Tuesday.
Traders were paying close attention to what Powell said, because they were his first public remarks since the FOMC decided to cut rates. Often, the first public appearance after the rate decision is a chance for the Fed Chair to revise his comments in light of the market reaction. With Powell generally sticking to the script, it seems to have cleared the way for more gains in gold. For now.
The Reasons for the Upside
Typically, gold prices increase as interest rates go down. That’s because gold doesn’t pay interest, like Treasuries do. The lower the interest rate paid on competing assets, the more valuable gold is in comparison. Additionally, gold trends higher as a safe haven asset. If investors believe there will be turbulence in the markets (say, because of high valuations), then they are more likely to find refuge in gold as well.
Powell pointed to both those conditions in his speech. He referenced downside risks to employment, which would keep the Fed on a more easing path. But, he also acknowledged that stock prices are “fairly highly valued”. That’s as close as a Fed Chair would come to say that stocks are overvalued. Overbought stocks implies an increasing risk of a correction, which would prompt investors to find refuge in gold.
Uncertainty is a Golden Opportunity
It’s not just traders who are loading up on gold. Central banks led by the PBOC and Singapore’s National Bank have been buying up gold even as the price keeps rising. Part of this has to do with a general de-dollarization trend, which has left central banks holding more gold than dollars for the first time since 1993.
Meanwhile, politicians in Washington are once again unable to agree on a spending package, which could lead the government to a shutdown by the end of the month. That kind of uncertainty usually weakens the dollar and supports gold as well. Even the thing that would normally leave gold going higher is positioned to support gold as well:
Inflation and Gold Gains
Normally, when there is a chance of inflation rising, it also means the central bank will raise rates to counter. Those higher rates would weigh on the price of gold. But, if inflation is set to remain high while the Fed is reluctant to hike rates or is even cutting due to the economic situation, then gold gold also continue to gain.
Given all these factors pushing to the upside, it’s essential to be cautious that the trend might reverse. Factors that weigh on gold are likely a surprise to the markets. Those include significant outperformance in US earnings this season, a resurgence in US job growth, or a de-escalation of the trade war.