Gold: Commerzbank considers the price fall overdone

Forced investor liquidation amid an equity market correction weighed on Gold, according to Commerzbank’s Carsten Fritsch. Friday’s 3.7% decline took the price to USD 3,870 per troy ounce, bringing October’s loss to almost 7%. Nevertheless, he argues that fundamentals, including high US public debt and limits on the Fed’s scope to tighten policy, continue to favour a higher Gold price in the coming months.

How Do Forced Selling and Debt Dynamics Affect Gold?

"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. Learn more.)