Gold Regains $1,500 – Where To Next?

(October 3, 2019 - Lawrence Williams)

As we predicted in our most recent article published here on October 1^st, after its recent sharp price fall the gold price bounced back rapidly to retake the $1,500 level.  U.S. economic data is just not nearly as strong as the Trump Administration would have us believe.  As a consequence, equities markets today took yet another big dive, re-igniting safe haven demand for precious metals, and gold and silver in particular, both of which saw big percentage increases, although neither are back to their recent highs.  And strength in the gold price even filtered through to the pgms, although in reality these should be considered industrial metals and should be driven more closely by the strength, or otherwise, of the global economy.

What appears to have boosted precious metals also is the recently released PMI data, with the September Chicago PMI coming in at 47.1 – falling for the third time in four months.  A reading below 50 signifies weakness in the manufacturing sector and the Chicago PMI covers the U.S.’s manufacturing heartland.  The latest non-farm payrolls increase released today, showed weaker than anticipated private sector job market growth at 135,000 new jobs created against market expectations of 140,000 and the previous month’s 157,000.  Ahu Yildirmaz VP and joint head of the ADP research institute is reported as commenting : "The job market has shown signs of a slowdown. The average monthly job growth for the past three months is 145,000, down from 214,000 for the same time period last year."

Is the U.S. thus heading for a recession?  Maybe.  Whatever the likelihood is of this, this latest economic data has to raise the odds of the U.S. Federal Reserve moving to reduce interest rates yet again at this month’s FOMC meeting – due at the end of the month.  And possibly again at the December meeting if no improvement is seen before then.  Lower U.S. interest rates are positive for gold in U.S. dollar terms at least and it is U.S. dollars that markets view the gold price, despite the yellow metal being at, or close to, all-time highs in much of the rest of the world.

We would anticipate that the latest data will kick gold back up to the $1,530-40 level this week or next, but we are not sure what will happen immediately thereafter.  Again, as we have pointed out before, every time gold looks like it might exceed the $1.550 level it leads to a big engineered decline initiated in the futures markets by those who see higher gold prices as an adverse reflection on the state of the U.S. economy which, in effect, it is.  But as we have also noted, the U.S. economy is not quite as strong as the Administration would have us believe, and we feel it i9s only a matter of time before it breaks out above $1,550 and starts to test the $1,600 level.  This could easily be in the next couple of months and probably certainly be by early in the new year.  It may take an external geopolitical event, or a major equities market downturn,  to initiate the breakthrough, but there is huge global uncertainty and such a trigger could happen at any time.