The ongoing war in the Middle East keeps raising worries about oil supply disruptions, and signs of fiscal stress have shown up in the French 10-year government bond (OAT) market too.
The yield hit the 5% range intraday on October 21, the highest level since 2002.
With news this unsettling, money rushing into gold seems like the obvious move, right?
✦ Spot Gold (XAU/USD) Daily Closes
Oct 12 - Oct 23, daily closes from GoldPrice.com, USD per ounce
But gold moved the other way. On October 23, spot gold slipped below $4,000 an ounce intraday, with an intraday low of $3,975. It closed that day at $3,996. Over the week, the price fell about 4%. Investors just can't make sense of it.
War and fiscal stress keep dragging on, so why is gold falling?!
Looking at spot gold's daily closes from October 12 to 23, the downtrend is hard to miss.
What Moved Gold Was the Fallout, Not the War Itself
Gold has long been seen as the classic safe haven. It doesn't depend directly on any one company's earnings or any one government's ability to pay.
Sure, the price hasn't risen every single time a crisis hit.
Still, for investors in risk assets like stocks, gold was common sense: the safe asset that protects you so your wealth doesn't crash along with everything else when stocks plunge or a global financial crisis hits.
So why is gold trending down this time, despite all the unrest?
✦ From War News to Rate Hike Odds
How an oil scare reached interest rate expectations
First, news from the war stoked fears about oil supply, which shaped the outlook for prices and interest rates.
Once news broke that Houthi rebels had attacked Saudi Arabia's energy infrastructure, the risk of supply disruption came into focus, and Brent crude closed at $116.72 a barrel on October 23.
When oil rises, transport and manufacturing costs go up and push prices higher again.
✦ September CPI at a Glance
US Consumer Price Index (CPI) and gasoline
US inflation looked shaky too. September's Consumer Price Index (CPI) rose 0.6% from the month before and 3.7% from a year earlier. Gasoline prices in particular jumped 9.1% over the month, making up more than half of the monthly increase.
Of course, these figures are September data, so they aren't the result of October's oil spike. But with price pressure already lingering, oil jumping on top of it made people worry that inflation will get even stronger.
Ahead of the Federal Reserve's FOMC meeting on October 27-28, the market mostly expects the benchmark rate to be held steady. But as of October 23, rate futures priced in a 78% chance of a rate hike in December.
That's because if higher oil prices actually turn into higher consumer prices, the central bank will have no choice but to consider raising rates.
Gold Pays No Interest, and That's Its Weakness
Gold itself pays no interest or dividends. Short-term Treasuries and cash-like assets, on the other hand, pay more the higher rates go. If rates stay at a high level for long, investors have to keep giving up high interest income just to hold gold.
That's the opportunity cost of investing in gold.
In this situation, war becomes a reason to buy gold and a reason to sell it at the same time. Geopolitical unrest does send people looking for gold.
But when that unrest pushes up oil and prices and leads to expectations that rate cuts will be delayed, it creates pressure in the opposite direction.
The market doesn't just ask 'is the world dangerous?' It also prices in how that danger will hit interest rates and the dollar.
Of course, rates alone aren't enough to explain this drop. On October 22, the day gold plunged, there were even reports that the US 10-year Treasury yield actually fell sharply.
Still, even with unrest around the world, there's no doubt interest rates are a big part of why gold can't find its footing.
✦ Who Pays You and Who Does Not
Interest and storage costs, side by side
You can earn interest just by leaving your money comfortably in a bank (even the French 10-year government bond yield is in the 5% range), while gold investors get not a penny of interest and are actually taking losses as the price falls.
And investors holding physical gold are probably paying extra storage costs on top of that.
When Stocks Crash, Gold Gets Sold for Cash
Analysts say the recent surge in tech stock selling increased investors' margin pressure and led to forced selling. When the value of holdings bought with borrowed money drops, brokers demand extra collateral.
An investor who suddenly needs cash won't sell only the stocks that lost money. They might also dump gold or other assets that are relatively easy to sell.
✦ Two Flows at Once in a Shaky Market
Gold gets bought and sold for different reasons
So when the market gets shaky, two flows show up at the same time: 'buying gold to avoid risk' and 'selling gold to raise cash.' Even if gold is a safe asset, it's also the easiest asset to turn into cash for an investor who needs money fast.
✦ September Gold Flows Pointed Different Ways
ETFs, futures positions and the gold price
Investment flows into gold were mixed in September too. According to the World Gold Council (WGC), global gold ETFs saw net inflows of about $10 billion in September even though gold fell 8.5% that month.
On the other hand, fund managers' net long positions in the US futures market (COMEX) shrank by about $12 billion in value. ETF money with a long-term bent and futures positions with heavy short-term trading went in opposite directions.
So if you see a headline saying 'Money is pouring into gold ETFs!' and think 'I'll make money if I buy gold now,' then jump in right away, you could get steamrolled by short-term selling in the gold futures market and end up with a loss.
Trouble in France Doesn't Automatically Lift Gold
✦ France's Bond Market in Numbers
Signs of a bigger fiscal risk premium
France's 10-year yield rising to 5.002% intraday on October 21 is a sign that investors are demanding a big risk premium over the government's ability to fix its finances and its budget talks.
At the time, the gap between French and German 10-year government bond (Bund) yields also widened to about 157 basis points.
France's fiscal stress does seem likely to stir up gold buying. But gold trades mostly in dollars on international markets. It's also an asset that investors around the world trade while pricing in many factors at once.
Say you look at one country's fiscal crisis and think, 'Something's about to blow up, so let's buy gold!' But if more investors think, 'French bond yields went up, so I'd rather sell gold and buy bonds,' the gold price falls.
The 'crisis = gold goes up' formula doesn't hold every time.
Lately it's not only gold; silver has fallen a lot too. Anyone who put money into gold and silver thinking, 'Safe assets will make me money when the world gets unstable!' must find all this absurd.
There's a war going on and major countries are hit by fiscal crises, yet the US stock market is hitting record highs while gold and silver prices trend down. Investing is really hard, isn't it?
This isn't investment advice. You know that, right? Let's each protect our own hard-earned money.
That's all for this post. See you next time.
Related posts
- French Bond Yield Nears 5%: What About Global Stocks?
- US GDP, Inflation and the Fed: 3 Numbers This Week
- Jobs Shock, Yet the Nasdaq Hits a Record? AI Bubble, Rates, and Oil in One Read
🌐 Korean version: 전쟁, 유가 급등, 프랑스 재정위기... 전세계가 불안한데 금값은 왜 떨어지는 거야? (feat. 안전자산의 역설)
No comments:
Post a Comment