Gold continues to ‘make hay’ in this environment of falling yields and a descending USD, with the precious metal looking ever more comfortable trading above the $2k level. Dovish interest rate comments by Fed Governor Waller gave reason for treasury yields and the DXY to tumble further, which opened a pathway higher for the gold price. With the USD down around 3%this month, gold now looks a more attractive option for foreign investors while the opportunity cost of holding the non-yielding gold has further diminished with treasury yields being supressed.
Spot gold was seen trading at $2044 an ounce during Asian trading hours on Wednesday. Some resistance awaits just above the $2050 level, while some potential profit-taking could also slow the momentum in coming sessions. However, if bond yields and the USD continue their retreat then gold could very well be eyeing a run back towards its 2023 highs.
Looking at the economic calendar for the remainder of the week, there are two key events which at least hold the potential to stem the bleeding in bond yields and the greenback. US Q3 GDP could see a minor revision higher (from 4.9% to 5%), which would signal that the world’s largest economy is still running relatively hot. While the latest Core PCE Price Index is also due, and while a decrease is expected (from 0.3% to 0.2%), inflationary data has shown a tendency to revert course on occasion so this figure will be closely watched by not only investors but the Federal Reserve committee members.
Market attention has already turned to when the Fed may commence cutting rates in 2024, so any upside surprises in the GDP or Core PCE Price Index has the potential to ‘upset the apple cart’ with regards to interest rate projections in 2024.
Oil is trading in a holding pattern this week ($74-$77 for the WTI contract) ahead of the OPEC+ ministerial meeting. Had the members all been in agreement, the meeting would have already taken place by now (it was scheduled for last weekend) but there appears to be some consternation about output quotas among members. Two possible outcomes from the meeting are either that the existing production cuts will be extended into 2024, or that the Group will further increase the size of the existing cuts (which currently stand at approximately 3.66m barrels per day).
For this scenario of larger group-level cuts to occur, it is likely that Saudi Arabia will need to cajole other members into further reigning in production levels. With Russia and Saudi Arabia currently combining for an additional 1.5m bpd worth of supply cuts, they will probably want other members of the OPEC+ group to share more of the burden in restricting supply in order to place upward pressure on the price. Let’s see what the group decides. The scale and scope of supply constraints will dictate whether oil is trading on a $70 or$80 handle in the short term.
Elsewhere, Australian CPI figures for October came in softer than expected at 4.9% verses 5.2% expected and 5.6% prior, y/y. Today’s numbers will be a welcome development for the RBA who can now afford to sit tight at next week’s meeting. The central bank will likely want to see how the inflation figures look on a quarterly basis rather than monthly before deciding whether a further rate hike is warranted in Q1 2024. Australian stocks gained after the data while the AUD eased in response to the softer number.