Metals Insights: Does Higher For Longer Spell Trouble For Gold?

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Gold has been in freefall after the Federal Reserve’s September 20th policy decision. Here, they telegraphed holding rates higher for longer, and the yield of the U.S. 10-year surged above 4.6% to the highest level since October 2007. This has pressured Gold to break below the monumental $1900 mark for the first time since March.

Is there any reason to believe Gold can recover in Q4, or is the stage set for a poor finish to 2023? Only time will tell, but here are the three things I’m watching.

First, the CME Group’s Fed Watch Tool is signaling a 33% probability the Fed will hike another 25bps before yearend and 4% they hike 50bps before yearend. While this equates to a higher probability the Fed officially pauses, the market is pricing in a chance they don’t. Also, given historical trends, the Fed cuts rates in seven to nine months after pausing. The Fed Watch Tool shows rates at the current 5.25 – 5.50% in May 2024. If this entire landscape shifts to a pause and then a cut by May, it would be supportive of Gold’s fundamental case. 

Next, is inflation re-emerging? Whereas a rise in inflation could prove to be a headwind to Gold, flatlining inflation could provide a tailwind. Despite the CME Group’s WTI Crude Oil contract surge by as much as 22% over the last month, the end products have been much more contained. Furthermore, the Cleveland Fed’s Inflation Nowcast is not forecasting an abnormal rise in month-over-month inflation for September. 

Lastly, we are entering a historically favorable period of time for Gold. Treasury yields were on a similarly relentless rise into the end of Q3 in 2018 and 2022. But this flipping the calendar paved the way for a bottoming process in Gold. Also, a strong U.S. Dollar in Q3 has been a direct headwind to Gold, but seasonally, the U.S. Dollar historically weakens at the onset of Q4. 

While these three narratives are on top of my list, we could see others emerge. We know this ever-evolving macro environment will certainly bring an exciting and opportunistic fourth quarter.

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