Gold prices hold steady after last week’s bear raid.
Since around mid-June, gold prices have come under substantial selling pressure. One of the main drivers behind this fall has been the on-going debate about interest rates.
While the general narrative supposes that higher interest rates will have a negative impact on gold, I have often stated that this assumption is not correct. The historical record shows that gold tends to rise with nominal interest rate rises – as was seen from 2004 to 2008 and in the 1970s – and the Fed is unlikely to raise rates in any meaningful way while deflationary forces persist.
According to the WGC, although higher interest rates would make the dollar more attractive to investors looking for higher-yielding assets, the current narrative that this scenario would be bearish for gold is incorrect.
It is true that higher real interest rates raise the opportunity cost for investors holding gold. But our analysis of the gold price and previous rate conditions found gold may perform reasonably well in a positive rate environment. Our analysis indicates that gold is only negatively affected when real rates nudge higher than 4%. The current outlook suggests the US rate increases will be moderate and real rates will be below 4% for some time.
In addition, markets are forward-looking and the forthcoming rate rise has been well flagged. It would be surprising if expectations of US rate rise were not already factored into the gold price.
Gold prices plummeted to five-year lows last Monday due to bear raid conducted by some mystery seller.
While many market commentators believed that Monday’s decline in gold began during Asian trading, in actual fact the first wave of selling took place when the equivalent of 24 tons of gold were dumped onto the Globex electronic trading exchange in New York in less than 2 minutes. Data revealed that the volume traded in one minute was 7,164 contracts, which at 100 ounces a contract is about 22 tons.
The selling began on the COMEX in the August futures contract on the CME Group’s Comex futures in New York a tenth of a second after 9:29 a.m. in Shanghai. Japanese markets were closed ensuring a minimal amount of liquidity and potential buyers to support the price. Then, an additional 33 tons of paper contracts flooded the Shanghai Gold Exchange.
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