Gold prices jumped above the key price point of $1,812 on Friday last week, buoyed by the fact that inflation fears were ignited once again when the U.S. Labor Department said that wages saw a 4.9% annual increase in October. Investors were also spooked by uncertainty over the Fed’s next move, as expectations mount for interest rate raises to be kicked out further into the future.
The Fed Chairman Jerome Powell stated last week that the Fed is patient with raising the interest rate (read: they’ve finally engineered inflation and hence negative interest rates, and will try to keep this environment going for the benefit of the government). A negative real rate environment, however, is positive for gold holders, because the opportunity cost of owning gold is reduced and the loss in purchasing power of the currency favours unprintable gold.
Although gold has been moving back and forth in mini rallies and slumps in the $1,750 and $1,800 range during the past few weeks, it has now found some new life this past week, as investors react with cynicism to the Fed’s comments.
Momentum has been carried into the new week as well, with gold prices trading between $1,820 and $1,830/oz – a near two-month high. Ole Hansen, head of commodity strategy at Saxo Bank, said that last week gold made some impressive gains, but that the market still needs to push above the critical $1,835 mark before the market sees new capital inflows.
Gold thus needs a breakout above $1,830 to inspire institutional money to climb on board, but that will require a hit to U.S equity markets. The U.S Dollar has dropped and the U.S 10-year treasury bond yield is back down below 1.5% – all good for gold.
It’s getting exciting – the yellow metal was last seen trading at $1,827/oz.