In recent weeks, gold prices have been on a wild rollercoaster ride, lurching one way then the other, driven mostly by uncertain and highly volatile expectations - expectations about the likelihood and possible consequences of U.S. military intervention in Syria as well as expectations about prospective U.S. monetary policy as the next Federal Reserve policy-setting meeting (September 17th-18th) draws near. With events in the Middle East remaining uncertain, with Russia’s own diplomatic offensive leading to who knows where, and with the next Federal Reserve Open Market Committee closing in, we expect the rollercoaster ride to continue - but it remains unclear whether we are heading higher or ready to take another fall.
To Taper . . . or Not
Many Fed watchers, financial-market traders, and investors expect the Fed will begin scaling back its monetary stimulus in the next month or, at least, announce a start date following its mid-September FOMC policy-setting meeting.
In April, when Chairman Bernanke hinted that a reduction in monetary stimulus could begin later this year, surprised gold-traders panicked and the metal’s price fell precipitously. Now, however, the possibility of tapering - a gradual dialing back of its super-stimulative monetary policy - is, for the most part, already reflected in the current gold price and the prices of other financial assets.
If, indeed, the Fed initiates - or simply announces - a start-up date for the implementation of a decreasingly stimulative monetary policy, the yellow metal’s price would likely suffer, at worst, a short-lived setback. Alternatively, if the Fed announces a continuation of business as usual - postponing any explicit decision about a start-date of tapering - gold prices could rally smartly. In either case, the magnitude of the move, up or down, will likely reflect Chairman Bernanke’s choice of words at his September 18th news conference.
But, importantly, tapering is not tightening - and monetary policy will, in any case, remain in a stimulative pro-gold mode for months, if not years, to come as the economy continues to struggle to regain its footings. And, in any event, as important as it is, there’s more to gold-price prospects than U.S. monetary policy.
If the Missiles Fly
Rising economic and geopolitical uncertainty associated with possible U.S. military action against the Syrian regime - and fear of possible unintended and unpredictable consequences possibly involving Russia, Iran, Hezbollah, Saudi Arabia, Turkey, and Israel - contributed much to the late August gold-price rally by increasing both safe-haven and speculative demand. And, the subsequent easing of war-related fears contributed much to the early-September gold-price decline.
When it seemed President Obama was on the verge of ordering a military strike, safe-haven demand propelled gold right through overhead resistance around $1,400 an ounce and sent the metal briefly above $1,420.
But then, the British Parliament’s resounding rejection of that country’s participation in any U.S.-led military action against Syria, Obama’s failure to drum up Congressional support here at home, and Russia’s proposed decommissioning and destruction of Syria’s chemical armaments together made a U.S. military action seem increasingly questionable and, in any case, not so imminent. Thus, began the downward correction that brought gold prices back to the $1,360 to $1,370 range of support late this week.
However, as of this writing, it now looks like the President will eventually receive bipartisan Congressional support for some limited military strike - and, if so, I’d expect the gold price to rebound, at least briefly, depending on concurrent monetary policy developments from the Fed. Indeed, the drag on U.S. and global economic activity arising from higher oil prices and the uncertainty-related postponement of business and household spending decisions could discourage the Fed from early tapering.
Seasonal and Other Factors
Looking ahead to the official start of autumn, seasonal factors, especially the approaching festival season and associated rise in gold demand in India, the restocking by jewelry manufacturers after the summer holidays, continuing strong demand from China, and a pick-up in central-bank acquisitions, should also contribute to gold’s recovery.
There may be other positive wildcards for gold over the horizon:
For one thing, fiscal gridlock and the approaching Federal debt ceiling could raise financial-market anxieties, weaken the greenback, and worse, trigger a downgrading of U.S. Treasury debt by the credit-rating agencies.
Not much discussed, the long-term decline in world gold-mine output already underway - and the strike by South African gold miners - is likely to further encourage some of the gold bulls, even if it has little significant affect on the metal’s overall supply/demand situation.
And, in the background, playing a supporting role, has been record physical demand from the gold-friendly Asian markets and cash-rich central banks as well as retail investors buying coins and small bars in Western markets.
Although gold certainly looks vulnerable in the very short run, these bullish gold-market trends and developments, taken together should be enough - irrespective of prospective Federal Reserve monetary policies - to assure gold prices move higher in the months and years ahead.
