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Three reasons gold could rise

24 September 2021

Friday 24 September 2021

In this week's market report:

  • Fed lays out tapering schedule

  • All isn’t lost bulls

  • Outliers that may spark a gold rally

  • Gold versus the global money supply

  • Inside the office this week

  • Before you go…

Shae Russell

Shae Russell,
Group Communications Manager

Dear Investor,

Today’s weekly precious metals market update comes to you early. It’s a public holiday in Melbourne where your writer is based. This update covers everything that happened prior to 5pm Thursday 23rd September. Let’s get started…

US dollar gold price [XAUUSD]
Daily chart

US dollar gold price Daily chart

(Click to enlarge)

Source: Trading View

The Fed has spoken, gold whimpered: Gold continues to be sensitive to news emanating from the US. Last week gold reacted to US retail sales, this week it’s the Federal Reserve Bank’s musing. The yellow metal has barely budged in the past two weeks on news of Chinese real estate giant Evergrande toppling over, with more than US$300 billion in debt on the books.

Fed lays out tapering schedule: Top brass at the world’s ‘mother central bank’ is no doubt aware of the fragility of markets and how they hang on every word from the Fed. No surprises were found in the press conference at the conclusion of the Federal Open Markets (FOMC).

Fed Chairman Jerome Powell confirmed that ‘While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.

  • The FOMC notes indicate ‘tapering’ is likely to start or reduce, its US$120 billion monthly bond purchasing program in or at, its next meeting, which is November.
  • In addition, the end of the September FOMC saw nine of the 18 Fed officials anticipate the need to raise rates by the end of 2022. This an increase on the June meeting, where seven officials expected a rate increase in 2023. 
  • Furthermore, Powell remarked on Evergrande’s collapse, saying: ‘The Evergrande situation seems very particular to China, which has very high debt for an emerging market economy…you would worry that it would affect global financial conditions through confidence channels and that kind of thing, but I wouldn’t draw a parallel to the United States corporate sector.

Gold’s trading range tightens…again: Once again the yellow metal price range is snug. Since Monday Au started the week at US$1,743 and topped out at US$1,788, barely moving US$45 per ounce. Gold traded conservatively throughout the week in the lead up to the end of the FOMC.

  • Stuck under the death cross: It’s crass, but gold is on the wrong side of what technical analysts call the ‘death cross’. That’s where the 50-Day simple moving average (SMA) is below the 200-Day SMA.
  • All isn’t lost bulls: As macabre sounding as the death cross phrase is, it doesn’t mean all is lost. Though it does reinforce the point that gold will struggle to break out to the upside. Two levels worth watching: If gold remains above US$1,720-40, we can expect more price consolidation. Gold needs to stay above US$1,680-90 to remain near term bullish.
  • And for the bears: Kissing US$1,680 isn’t a reason to rejoice my bearish friends. Though it does put US$1,620(ish) in play, which could lead to US$1,550-60. Possible yes, probable no.  If either of these levels are triggered, I would say we could the make the case for it being a liquidity issue, as opposed to changes in the fundamental set up for gold.

Outliers that may spark a gold rally: The world’s favourite precious metal is stuck in a tight range and the technical picture favours the bears, but there are things to keep an eye on, that could see gold surprise to the upside:

  • Any negative US jobs data.
  • The US government runs out of money in October. The debt ceiling has yet to be revised higher to cover government expenses.
  • Higher inflation data that would trigger a larger, or faster, roll back of tapering.

Australian dollar gold price holds steady: Lifting the Aussie dollar gold price this week, is the falling Australian dollar. Holders of gold in our currency may be thankful for the volatility in AUD. The fluctuating Aussie dollar is buffering the performance of gold, saving precious metal portfolios from major falls. Much like last week, swapping buckaroos for gold is around AU$2,435 per ounce.

Gold versus the global money supply

Some interesting charts from Merk Investments. Once again, we have the comparison of real rates versus gold. As noted last week, gold has diverged from real rates, however the yellow metal tends to catch up eventually.

US dollar gold price v. US 10yr Real Rate

(Click to enlarge)

Source: Merk Investments; Bloomberg; Metals Daily

Gold and the Global Money Supply

Then we have the gold price compared to a proxy for global money supply (below).

It’s food for thought, but shouldn’t be taken as reason for gold to ‘lift off’. While an expanding money supply can be inflationary, it doesn’t automatically equate to higher gold prices.

The dynamics that drive inflationary pressures are diverse, and generally specific to individual economies. This image is interesting to observe. Yet it doesn’t show the 1980s for example, where the money supply significantly increased (‘significant’ for the time at least, minimal by today’s standards) but gold was in a bear market.

US dollar gold price v. US 10yr Real Rate

(Click to enlarge)

Source: Merk Investments; Bloomberg; Metals Daily

MKS PAMP insights

Precious metals trading and industrial service MKS PAMP GROUP, released a presentation earlier in the week, sharing their macroeconomic expectations and assumptions for 2021 – 2022.

Their analysis sees the global economy likely to be cycling through ‘reflation (liquidity-on & growth) and stagflation (liquidity-off & peak growth)’. Adding the ten key risks to take note in the coming 16 months:

  1. COVID & policies: A stagflationary force.
  2. Growth & recession risk: Slowing of global GDP from 2021 peaks, led by the US, to more sustainable levels.
  3. The Fed & global central banks: Diverging strategies between DM & EM CBs given different vaccination rates.
  4. Inflation: Elevated with risks higher.
  5. Risk Sentiment: Enormous amounts of sidelined liquidity, risk for a melt-up in equities.
  6. Geopolitics: Messy. The frequency of ‘off-calendar’ geopolitical events/risks is rising.
  7. US politics: More polarized but a bigger government.
  8. FX trends: Mixed US dollar outlook.
  9. Supply-chain risks: Higher until there is global herd immunity.
  10. Climate change: Large ‘transition risks’.

Furthermore, they shared this chart that shows how long it can take for the gold price to recover after a commodities bear market. The uplift in precious metals may take a few more months yet.

Precious metals recovery from
previous commodity bear markets

(Click to enlarge)

Source: MKS Pamp Group

Inside our office this week

Precious metals and where to keep them seems to be the hot issue this week! Our Brisbane office tells us lots of people want to know how, or where to store precious metals. If you’re new to bullion storage, click here for more.

Over in our Sydney office, once again we are seeing many clients investigating Gold Saver and how they can slowly build a position in precious metals for long term wealth accumulation.

Gold saver accounts are a great way to access both gold and silver. You can nominate the frequency of deposits, as well as how much! Plus you can always take possession for a small baring fee.

Before you go…

A potential banking crisis lurks and gold isn’t reacting. Why? Today Shae Russell sits down with Nick Frappell to analyse what this means for gold, what’s impacting the Aussie dollar and a quick look at the recent iron ore sell-off.

Evergrande may not be a Lehman Brothers moment…but it may be something else altogether. Click the image below to watch now.

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion

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