Gold has had a stellar run this year, gaining 48% since January 1st, and is on track to have the best gains since 1979. While this is positive for gold bulls, it is somewhat concerning for the rest of the market. The late 70s and particularly the early 80s were a period of high inflation, economic stagnation, and overall market turbulence. It seems traders might be worried that history will repeat and are piling into safe havens.
On Wednesday, the US officially entered a government shutdown as its spending authorization for the fiscal year expired. The uncertainty this generates has left gold scoring a new all-time high for the fifth consecutive day, on track to close above $3,900 per ounce on the spot market. The question for traders now is whether this extraordinary rally can continue, or will it at least pull back slightly to regain some momentum.
Conflicting Factors Pushing Gold Prices
The US government is the largest holder of gold, but China is the largest buyer. And coincidentally, October 1st is the start of its National Day Golden Week, an 8-day holiday. The holiday in China is structured to allow its citizens to travel around the country. With Chinese markets closed, there is a distinct drop in demand for gold.
Typically, gold prices decline ahead of and during the first few days of Golden Week, but then rebound to new highs. There are several theories for why that happens. One is that the absence of demand for physical gold leaves ETFs having a larger influence on the market.
Investors Are Still Piling Into Gold
That might indeed be the case this year, as inflows to gold ETFs in September were the highest in three years. However, it’s just the culmination of a trend that has been ongoing all year. In aggregate, flows into gold ETFs during the first half of the year have been the strongest since the pandemic. Part of that could be explained by the 10% drop in the dollar over the same period amid US fiscal uncertainty.
The government shutdown will likely do the opposite of reassuring markets about US fiscal policy, which could exacerbate demand for safe havens like gold. Both retail and institutional traders are currently piling into gold, which suggests it may continue to trend higher.
Up is not a Guarantee
With gold striking a new all-time high on the first day of Golden Week, it seems the traditional pattern of gold declining and then rebounding will not repeat this year. But the combination of uncertainty and the return of Chinese buyers next week could simply mean that gold accelerates to the upside.
On the other hand, markets are closely watching an emerging divergence in views among Federal Reserve policymakers. The upside for gold relies significantly on expectations that the Fed will cut rates at each of the remaining two meetings. However, the government shutdown could disrupt the system. A prolonged shutdown could mean that the Fed lacks access to some of the crucial data needed to make an informed decision, such as labor market data. At any moment, politicians in Washington could announce that they’ve reached an agreement, thereby reducing market uncertainty. That could bring gold prices down with little warning.
