Gold’s price decline looks excessive, says Commerzbank

A 3.7% fall on Friday took the Gold price to USD 3,870 per troy ounce and brought October’s decline to almost 7%, Commerzbank’s Carsten Fritsch notes. In his view, investors’ forced liquidation of positions amid an equity market correction drove the sell-off. He maintains that high US public debt and limits on the Fed’s scope to tighten policy remain fundamental reasons to expect a higher Gold price in the coming months.

Forced selling weighs on Gold as debt limits tightening

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"The gold price fell by 3.7% on Friday to USD 3,870 per troy ounce, its lowest level in more than a year. This resulted in a substantial monthly loss of almost 7% in October, which was even slightly larger than that recorded in September."

"Given the robust US economy and inflation running well above target, a further rate hike in December is highly likely. Expectations of rate hikes have led to rising bond yields and (real) interest rates, which in turn increase the opportunity cost of holding gold and, conversely, reduce the attractiveness of holding gold."

"However, this can only explain the current fall in the price of gold to a limited extent. This is because, following last week’s Fed meeting – at which, as expected, the Fed left interest rates unchanged – interest rate expectations have eased and both nominal and real bond yields have subsequently fallen."

"We consider the price decline in gold to be excessive and unwarranted. The arguments in favour of a rising gold price remain valid."

“Higher interest rates would cause debt servicing costs to rise further. This also explains US President Trump’s desire for lower interest rates. Even though the Fed has resisted this, it is unlikely to be able to raise interest rates by as much as would actually be necessary to combat high inflation, given the debt problem mentioned above. Such a scenario points to a higher gold price.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Find out more.)