Negative

The gold price today is perhaps not doing what investors going long in the precious metal are hoping: to act as a hedge against both inflation and the potential deflation of other financial assets. So, what is the best strategy in the short term?

X

While some market professionals believe in gold’s long-term prospects, traders need to respect the market’s message.

Put another way: If the precious metal goes into a bigger correction, they need to cut losses and protect their overall portfolio.

Gold Price Today: Falling Hard Lately

Gold futures for October delivery dropped almost 1% on Friday to $1,864.60, according to Thinkorswim data. That marked a six-month low. Gold also slipped 9% below a 52-week high of $2,048 hit on May 4, based on Dow Jones Data. Talk about a brutal September for gold, as the commodity dived 5.2% for the month.

The drop on Friday also cut gold futures’ gain to 1.8% since Jan. 1. That raises the prospect that, with further decline, the return could go negative.

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On Monday, gold futures in the December-expiration contract lopped off another 1.1% to $1,846 an ounce, breaking the $1,850 level for the first time since March 10.

Is gold’s performance since the start of January a measly return, compared with an 11.7% rise by the S&P 500 over the same time frame? Surely. From a longer time frame, the outperformance of U.S. equities vs. the shiny metal grows even starker.

Using MarketSmith’s performance comparison chart tool, the 500 has rallied 72.5% from March 31, 2020, near the bottom of the Covid pandemic bear market decline, through early Monday action. Much bigger than a 11.1% gain by SPDR Gold Shares (GLD), a popular exchange traded fund.

Why the big disparity?

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Reasons For The Decline

The biggest reason could simply be the strength of the U.S. dollar. Given that the shiny metal is priced in U.S. dollars in most of the major trading exchanges around the world, the ongoing strength in the buck vs. other key currencies likely makes gold more expensive to buy among foreign investors.

On Monday, the euro fell to $1.0481. Meanwhile, the U.S. greenback is selling for 149.83 Japanese yen, up more than 13% year to date.

As the accompanying monthly chart of Invesco DB U.S. Dollar Bullish (UUP), shows, the U.S. dollar has made a remarkable move higher since bottoming out in the summer of 2021. The Federal Reserve’s monetary tightening campaign has made U.S. Treasury securities more attractive given their higher yields. Overseas investors who want to own U.S. debt securities must purchase them with U.S. dollars.

That said, Ned Davis Research, in its latest macro strategy note sent to clients, holds a “Bullish” rating on gold and a “Bearish” grade on the U.S. dollar.

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Will Falling Inflation Shrink Gold Price Today?

The traditional notion about the gold price today as an expression of inflation fears still has relevance. When the prices of goods and services are raging, gold logically serves as a hedge. However, various measures of consumer and producer-level prices have shown that inflation peaked in the summer of 2022 and continues to fall.

Friday’s August PCE (personal consumption expenditures) index highlighted more progress on cooling inflation. The Econoday forecast saw the core U.S. PCE index edging up 0.2% in August vs. the prior month and increasing 3.9% year over year. Core PCE rose just 0.1%, below the consensus view, and 3.9% vs. a year ago, meeting the Econoday estimate.

In July, the core PCE index grew an upwardly revised 4.3% vs. a year earlier. That’s still below the current fed funds rate, or what large banks pay on overnight cash infusions from the Federal Reserve. So this means that in the U.S., real interest rates are positive. Holders of U.S. Treasury debt get can receive a positive return after accounting for inflation.

Federal Reserve Research On Gold And Rates

Research by the Federal Reserve Bank of Chicago done in 2021 finds that real interest rates also has a strong effect on gold. How so? When real interest rates are positive — as they are today — investors are encouraged to accumulate financial assets that actually provide either dividends or interest to the holders. Gold does not.

The Economist, in citing the Chicago Fed’s research, reported in its July 15, 2023, issue that “the metal will increase in price in inflationary periods if central banks are asleep at the wheel, and real rates fall, or if investors lose faith in the ability of policymakers to get it back under control. So far, neither has happened during this inflationary cycle.”

Meanwhile, the strength of the U.S. economy, despite the Federal Reserve’s 18-month-long policy move to raise short-term interest rates to 20-year-plus highs, also has made gold less attractive.

On Thursday, U.S. gross domestic product registered a 2.1% annualized gain in the second quarter vs. the prior quarter, according to final data. This reading drills holes through the argument that the U.S., for now, will return to its late 1970s era of stagflation — stagnant economic growth with high inflation.

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Would Bigger Government Budget Deficits Jump-Start Gold?

A third reason to think gold prices today should go higher? The United States’ failure in recent decades to follow a balanced government budget has some investors worried about the future of the finances of the world’s No. 1 economy.

For decades after the end of World War II, the dollar was pinned to gold, thanks to the Bretton Woods agreement. But in August 1971, the Nixon Administration ended the gold standard for the U.S. dollar. Why? It hampered the government’s ability to increase spending for the Vietnam War and deal with a deficit in its balance of payments.

Without question, the dollar has replaced gold as the prime medium for global wealth, investing and trade.

Despite this severed connection between the gold price and fiscal and monetary policy, gold has attracted investors for its long-term price appreciation. Back in October 2003, gold futures traded between $366 and $393 per ounce. Two decades later, gold has enjoyed a nearly fivefold increase.

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Gold Stocks To Watch

(Data as of Sept. 28, 2023)

Barrick Gold Corrects Further

Meanwhile, a slide in gold price has spilled into heavy selling among gold mining stocks.

Barrick Gold (GOLD), one of the largest companies within IBD’s gold and silver mining industry group, nose-dived 7.9% for the week. Barrick shares slipped another 2.2% in above-average volume on Monday. At 14.23, GOLD shares have fallen 31% from a 52-week high and more than 55% below its 2020 peak of 31.22.

Never mind the additional statistic that Barrick Gold has also plunged more than 75% from its September 2011 high of 55.95. It currently holds a $25 billion stock market value and 1.76 billion shares outstanding.

IBD’s gold mining industry group headed into Monday’s trading ranked a dismal 190th out of 197 IBD industry groups as of six-month price-weighted performance. The group holds 74 companies. Eight stocks possess a Relative Strength Rating of 80 or higher. Only Alamos Gold (AGI) (99 Earnings Per Share Rating, 81 RS) trades for at least 10 a share.

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How Investment Banks View Gold Price Today

Going back to the state of gold prices today, Solita Marcelli, chief investment officer for the Americas at UBS (UBS), reasons that gold’s benefits as a safe haven remain intact.

“Our analysis shows that a mid-single-digit percentage allocation to gold in a balanced USD-based portfolio would have improved risk-adjusted returns and lessened drawdowns over recent decades,” Marcelli wrote in a recent client note emailed to IBD.

Marcelli adds that gold still can act as a “longer-term portfolio hedge especially in the context of an uncertain global growth outlook, volatile equity market dynamics, and unsettled geopolitics.”

UBS also cites data from the World Gold Council that central banks bought a net total of 55 metric tons of gold in June. These mighty players reversed three months of net selling. At the end of June, the gold price stood at $1,927 an ounce.

Finally, Marcelli’s team has found that a rise in gold buying by exchange-traded funds typically occurs just ahead of a cycle in easing U.S. interest rates. These market players saw outflows during the first half of 2023.

The future of the gold price today ultimately relays a noise-free message on the balance of supply vs. demand, whatever the reasons. Gold won’t rise again until demand becomes overwhelmingly strong.

Please follow Chung on X/Twitter: @saitochung and @IBD_DChung

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