What explains the gold price falling so sharply?

outlook

Today we get a bunch of real estate data as well as the Conference Board Consumer Confidence Index. We believe consumer surveys are not useful because consumers do not understand the economy, as evidenced by the fact that they voted for a new president who will cause a huge increase in inflation. Still, there is some application in the form of what the Fed considers confirmation bias regarding demand for goods and services.

Markets are behaving normally, as strange as this statement may seem – big jumps on big news, as we saw with the appointment of a new finance minister. But that’s just a single ray of hope in an otherwise increasingly dark world. Yesterday’s impulsive tariff story, reverberating today, is just the beginning of the great Trump disruption. This creates a conflict between sound economic thinking and knee-jerk reactions to further shocks. Example: What happens to the price of all these cars built in Mexico? Where do you get garden mulch if not from Canada?

Bloomberg has a story about panic buying in the fourth quarter, particularly in China, to build inventory before tariffs hit. Those who buy supplies now will sell them in the first and second quarters as if they had paid the price after the tariff was imposed, meaning a nice boost to importers’ revenue but misery for the consumer in need of a new washing machine .

Every top economist warns that tariffs are inflationary. Former TreasSec Summers, commenting on weekend television to us fellow Americans, emphasized that we have only just overcome the supply-side inflation caused by the pandemic and that this will be far worse supply-side inflation. Open the Wall Street Journal and find out who is criticizing the tariff plan today. Yesterday it was Alan Blinder, a former Fed, who literally wrote the book (A Monetary and Fiscal History of the United States, 1961-2021).

As mentioned yesterday, the big event this week is the PCE in the US on Wednesday. In September, the core interest rate was 2.7% year-on-year, the same as in August, and this time a small increase to 2.8% is forecast, despite the trade economics forecast of 2.8%. Tired, we have to prepare for the usual variations of the quotation method, including m/m and 3-month and 6-month averages, as well as supercore.

The big question is, what will be the impact on 2- and 10-year returns? The correlation of these spreads is an important foreign exchange factor. We are already seeing the gap between the US and Japan narrowing, coupled with suspicions that Mr Ueda is about to raise rates or at least make more hawkish statements. Japan whispers, but hardly any Westerners are prepared for it. In a logical world, the threat of rising inflation “should” drive yields, and therefore the dollar, higher again.

The Gold Puzzle: The huge drop in the 10-year Treasury note is also a major contributor to the dollar’s decline, but what explains the gold price falling so sharply? The usual simple answer is: dollar goes down, gold goes up and vice versa. If we have both in the red, the dollar’s decline must be attributed to a temporary condition. It is still at high levels and is likely to return to new highs. Well, we don’t remember this as standard development. Comments on gold have become increasingly bizarre in recent years since cryptocurrencies came into existence.

Bloomberg writes: “Gold fell as the dollar rose after President-elect Donald Trump threatened 25% import tariffs on Canada and Mexico…”A stronger dollar reduces gold’s appeal by making it more expensive for many buyers.” However, the dollar overall was not stronger yesterday. Bloomberg continues: “Gold bullion traded at around $2,620 an ounce, after plunging 3.4% in the previous session as Middle East tensions eased and safe-haven demand fell.” Talk about Cherry picking.

We believe that the chaos that Trump will cause can only drive gold prices higher. Bitcoin and its cousins ​​are kind of fun, especially the part where proponents get their act together and declare that cryptocurrencies have intrinsic value and are money. It has no intrinsic value and is not money. Money is trust – the trust that it can be used for transactions, is a store of value, and is the way we measure the value of things. Crypto only has the temporary trust of the people who own it that the other people who own it won’t abandon ship. When trust goes out the window, as it certainly will with predictable regularity, gold will be the beneficiary, not crypto the victim.

Central bank meetings

ECB December 12th.

Fed December 18th.

BoE December 19th.

Bank of Japan December 19th.

forecast

A Middle East ceasefire agreement may be imminent and many expect Trump to broker a deal with Putin that doesn’t give him all of Ukraine. These factors are seen as incentives for risk-taking. It’s also a short-term issue, as neither problem is even close to being “fixed.”

Similarly, analysts struggle to frame the “disruption” that Musk and his gang could reasonably cause, noting that bureaucratic herds need to be weeded out from time to time (and that’s something voters have wanted since shortly after Eisenhower). wanted). This is also wishful thinking, because reasonableness is not the style of this show.

It is obvious that current inflation is still stubborn and future inflation is likely to be horrendous. The disruption in US-UK and US-Europe relations has remained off the headlines since November 5th. These are two factors that are triggering expectations of risk aversion, an end to Fed rate cuts, and frightened traders and investors rushing into the dollar. Admittedly, these are longer-term issues, but we expect them to become clearer and more urgent as January 20 approaches.

Tidbits: Comments from regional Fed presidents can take up your entire day if you’re not careful. But this time, we should note that Minneapolis Fed Kashari says the 25 basis point rate cut at the December meeting is well worth considering.

His argument is that even with higher interest rates, the economy is more resilient than anyone expected, which means that pesky hypothesis, the “natural” interest rate, is also probably higher than we thought. Bloomberg summarizes: “The longer this resilience lasts, the more he believes this change could be structural, not just temporary.”

This comment could well be the Fed’s justification as it scales back its rate cut expectations for 2025.

Note to readers: Thursday is a national holiday in the USA. There were no reports on Thursday and Friday of this week.

This is an excerpt from “The Rockefeller Morning Briefing,” which is much larger (about 10 pages). The briefing has been published daily for over 25 years and represents experienced analyzes and insights. The report provides comprehensive background information and is not intended as a guide to Forex trading. Rockefeller produces additional reports (in spot and futures reports) for trading purposes.

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