Election Day Brings Sharply Higher Gold

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The gold market is sharply higher at midday Tuesday as a combination of factors drive buying in the metal. The market is seeing some benefit from short-covering, bargain hunting, and risk aversion as the crypto markets are sold off today. One crypto exchange has reportedly halted withdrawals today, and that has spooked investors into buying gold and silver today as tensions rise. According to the World Gold Council, gold has risen more than half the time over six months following the midterm elections. This time may prove to be no different, especially if the Fed does decide to reverse course on rate hikes in the months ahead.

 

Today is midterm election day in the U.S. The majority of people seem to believe the Democrats will lose the House and possibly the Senate as well. Any Republican victory today may make it harder for policies to be enacted in the next two years, effectively creating a sort of policy gridlock. Such a scenario could potentially boost the gold market as it may drive investors into its perceived safety. The unknown election results may also be lending gold some support today.

 

In other news, the Covid-19 virus remains a huge factor in global growth. China just reported 7500 new cases of the virus yesterday, and fears of additional lockdowns are on the rise. As the globe’s second-largest economy, any lockdowns in China can potentially crimp or even halt the production of many products. This lower production can slow the global economy tremendously, possibly even putting it into a recession.

 

Global markets will also continue to pay close attention to rising interest rates. In the U.S., higher yields and a stronger dollar have both been major roadblocks to higher gold. These may remain elevated as long as the Fed keeps its foot on the gas. If the Fed takes a pause or starts easing rates in early 2023, however, the dollar and treasury yields may both deflate quickly, possibly paving the way for sharply higher gold prices.

 

After spending many weeks in a range between the $1600 and $1700 levels, gold has finally broken out to the upside. This could mean that follow-through buying may be seen in the days ahead and that the market may now begin to trend higher instead of lower. Today’s breakout could be the beginning stage of a sustained move higher in gold. The bulls will need to keep buying, however, as the market may remain vulnerable to a rapid pullback based on election results and other factors.

 

The gold market may take a slope and steady approach to higher ground as the year comes to a close. The Fed will almost certainly hike again in December, although the hike could be smaller than 75-basis points. This week’s CPI reading due for release on Thursday may set the stage for the Fed and determine how much it hikes next month or even beyond.

Gold ETF Outflows

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The gold market saw net outflows from its ETFs again in October. Global ETF outflows were some 59 tons or $3 billion for the month of October. The outflows put the total net holdings of global gold ETFs down 52 tons for the year. Gold ETFs began the year on the right foot, seeing significant inflows of 316 tons from January to April. Since that time, however, the dollar’s strength and an aggressively hiking Fed have deflated demand for gold to a large degree.

 

All global regions appeared to see outflows last month, with the North American and European regions leading the pack. Global demand for physical gold has remained robust at the same time, with central banks going on their largest buying spree on record. The 400 tons purchased by central banks during the third quarter is a figure that is often the amount purchased over the entire year. Since January, central banks have bought some 637 tons of gold, the largest amount on record since the gold standard was still in place.

 

The difference between gold ETF outflows and record central bank buying may point to one main theme: Those in the know are buyers and those not in the know are sellers. Although this is often the case, it appears to be very clear in this instance that central banks, the most powerful financial institutions on the planet, are buying gold for solid reasons. The investing public is getting out of gold due to a lack of performance. Central banks recognize and understand the value of gold and do not simply rely on its performance when deciding whether or not to own it. John Q investor, on the other hand, is likely far more focused on the “what have you done for me lately” narrative and is therefore dumping gold as it has lacked upside for some time now.

 

Central banks know that while the value of gold could go up, and rise dramatically, it also serves other purposes. Gold is the ultimate portfolio diversifier, adding much-needed diversification to portfolios of stocks, bonds, currencies, and other assets. Gold may also provide an important hedge against inflation. While stocks have seen some crushing days in recent months, the declines for gold have been much smaller and more “controlled.”

 

Once the Fed signals it will take its foot off the gas, the gold market may skyrocket. This is unlikely to happen until sometime early next year, but the day is coming. Once the era of aggressive rate hiking has come and gone, the path to higher gold may become abundantly clear. For the time being, gold may remain stuck in its recent trading range. The $1600 and $1700 levels are key technical support and resistance here. Once either side is breached, on a closing basis, the market may continue in that direction. Despite some investors dumping their gold ETF holdings, the central banks often referred to as the “smart money,” are loading up and patiently awaiting gold’s return to dominance.

Gold Higher As Recession Gauge Hits 40-Year High

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The gold market is sharply higher Friday as a key recession gauge hit a 40-year high. Investors are reacting to the news that the yield on two-year notes has overtaken the yield of 10-year notes by 50 basis points. This is the most significant yield curve inversion since the 1980s, the last time the Federal Reserve was this aggressive with interest rates. Gold is higher by more than 2% on the day as the inverted yield curve and bargain hunting fuel the upside.

 

An inverted yield curve has always preceded a recession, and there is no reason to think that this time will be any different. With recession odds at 40-year highs, gold could stand to see more follow through buying in the weeks ahead. Although investors still expect the Fed to continue on its inflation fighting path, raising rates through 2023, that projection could change quickly if the threat of recession turns into reality. The Fed could very well find itself singing a different tune in early 2023 if the economy does tip into a full-blown recession. Not only could rate hikes stop, but the central bank could also even decide to start easing rates and taking them lower again.

 

The Fed has stated it wants to get inflation back to its desired target of 2% annually. This goal seems quite far-fetched at this point, however, as inflation remains near 40-year highs despite the Fed having hiked rates aggressively over the last year. The Fed could discover, sooner rather than later, that its objective is unattainable. Once the Fed realizes this fact, it may take an increasingly dovish approach to monetary policy and could start to take rates down again.

 

Also adding to some bullish sentiment this week was a recent report from the World Gold Council. The report stated that central bank buying of gold in the third quarter hit a record. Central banks bought nearly 400 tons of gold in Q3 for the biggest buying quarter on record. There could be numerous reasons for this increased central bank demand, including worries over the dollar, the war in Ukraine, the threat of a Chinese invasion of Taiwan and fears of a global recession. Whatever the case may be, if the largest financial institutions on the planet are buying gold, perhaps you should consider buying gold as well.

 

The market remains range-bound. The $1600 and $1700 levels are the key technical areas that must be breached for an extended move. The market has remained in between these levels for weeks now, and there is nothing to stop it from remaining in between them for an extended period of time. Once gld does breach these levels, on a closing basis, it could signal the beginning stages of an extended run that could take gold back to all-time highs or down to $1500. Central banks appear to feel odds may be greater for upside than downside. Either way, the long-term bullish thesis for gold remains fully intact.

The Aftermath

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The highly anticipated FOMC meeting has now come and gone. As was widely expected, the Fed did raise rates again by 75-basis points. Whether the central bank provided any clues about future dovishness is debatable. The stock markets initially reacted to the rate hike by moving sharply higher. As time wore on, however, equities eventually lost their steam and headed lower, ending the day in the red.

 

Stocks are lower Thursday afternoon as of this writing. Gold today hit a six-week low as investors are still attempting to decipher the Fed’s commentary and intentions. One thing does seem fairly clear at this point however: The Fed will keep hiking.

 

With four 75-point hikes in a row now, the Fed has continued to prove wrong those who felt it would reverse course by the end of the year or sometime “soon.” The central bank has been careful, in fact, not to fuel any dovish flames by suggesting it could soon look to stop hiking or even reverse course and start easing. Fed Chairman Powell yesterday left little in the way of ambiguity, and the Fed still appears intent on getting inflation to its desired 2% annual target. How the Fed may accomplish that objective is another question, as its previous rate hikes have thus far done very little in the way of reducing price pressures which remain near 40-year highs.

 

The markets again find themselves grappling with the unknown. Even if the Fed decides to hike by less in December, it does not necessarily mean the Fed has reached the end of the tightening cycle. The central bank has now seemingly acknowledged its previous mistakes, and it may not be likely to make another one by reversing course before the job is done. At stake is the Fed’s credibility, of which it already has little, if any.

 

The question then becomes how will markets react to the Fed maintaining its plans and taking rates even higher. Stocks have exhibited some selling and volatility in recent months. The month of October for equities was spectacular, however, although large, sustained rallies are not at all uncommon in bear markets. The gold market has done very little in recent months. The declines seen in the yellow metal have come at a time when global central banks are buying gold like mad. The central bank purchases may be what is holding the floor underneath gold at this point, however, and if they see a major decline gold could potentially fall through the floor.

 

Assuming central banks and large market participants remain active, the gold market may simply look to outwait the Fed. Once the Fed does signal a slowing pace of rate hikes or it looks to begin easing policy again, the gold bulls could come out in force to drive prices back towards all-time highs or beyond. The question is not whether that day will come, but rather when it will.

Q3 Sees Central Bank Buying Record

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Although you wouldn’t know it from the gold market’s recent behavior, central bank buying of the yellow metal has remained robust. These financial powerhouses have bought significant quantities of gold in the third quarter as inflation worries and other factors have fueled market volatility and investor angst. A quarterly report by the World Gold Council stated that central banks grabbed nearly 400 tons of gold in the third quarter, the most on record. The WGC also suggested this figure represents a jump of some 300% from the year prior. Obviously, central banks are seeing the need to go out and buy gold. Perhaps you should consider doing the same.

 

Of interest in the WGC report is the fact that the largest players were anonymous. Some nations, such as China and Russia, often prefer to keep their gold buying to themselves and do not report their purchases. Given the current war in Ukraine and a possible Chinese invasion of Taiwan, it certainly seems plausible that China and Russia could be the faces behind the anonymous buyers.

 

Of the known buyers, the central banks of Turkey, Uzbekistan and Qatar were the biggest purchasers. Turkey bought 31 tons of gold in the third quarter, boosting its total reserves to some 489 tons. Uzbekistan has been buying gold consistently, and added 26 tons to its holdings in the quarter. Qatar added 15 tons of gold in July, its largest monthly purchase on record.

 

The recent string of gold purchases has been a stark contrast to what has happened in the gold market. Prices have declined for seven straight months now, and one has to wonder if those declines could have been far steeper without such heavy buying from central banks. Gold ETF outflows have also likely been a factor. These ETF outflows are likely to continue until sometime next year which is the soonest the Fed would likely begin to pivot away from the inflation fight.

 

Gold’s fortunes may remain unchanged until the Fed does in fact start to pivot away from raising interest rates. The Fed will almost certainly finish off the year with another hike next month. Next year and early 2023 remain up in the air, however, and could provide the Fed a chance to start undoing the mess it has created by raising rates aggressively over the last several months. Once the central bank begins to ease rates again, the gold and equity markets may both breathe a sigh of relief and start heading higher again.

 

Until that time, the market remains stuck in no man’s land. The $1600 and $1700 levels remain key technical areas that could dictate price action for the months to come. Whichever side is breached first, on a closing basis, may see prices continue in that direction for a period of time. Such a breach could be a ways off still, however, and the market could maintain a tight trading range for some time.