Gold’s Pullback is Healthy

September saw a healthy pullback in the rally for gold and silver bullion. Gold lost $51.30 to close the month at $1,472, a loss of 3.4%. YTD gold is up 14.8% as of 9/30/19. Silver bullion fell 7.4% for the month, but is up 9.7% as of 9/30/19. Gold equities retreated as well, but have gained 30.9% YTD as measured by Sprott Gold Miners ETF (SGDM).

Month of September 2019

Indicator 9/30/19 8/30/19 Change % Chg Analysis
Gold Bullion $1,472 $1,524 ($51.30) (3.4)% Short-term correction; support $1,450
Silver Bullion $17.00 $18.36 ($1.36) (7.4)% Pulled back to breakout level
Gold Equities (SGDM)1 $22.95 $25.66 ($2.70) (10.5)% Dollar strength creates headwinds
DXY US Dollar Index2 99.39 98.81 0.59 0.6% Steady rise
U.S. Treasury 10 YR Yield 1.66% 1.50% 0.16% 10.9% Short-term sideways before lower
German Bund 10 YR Yield (0.57)% (0.70)% 0.13% 18.6% EUR 5Y/5Y rolling over; yields to follow
U.S. 10 YR Real Yield 0.14% (0.04)% (0.19)% (190.0)% Still trending lower
Total Negative Debt ($Trillion) $14.9 $17.04 ($2.15) (12.6)% Pull back inline with yields
CFTC Gold Non-Comm Net Position3 and ETFs (Millions of Oz) 116.9 115.0 1.88 1.6% Buying continues; new all-time high

Gold Bullion Consolidates in September

Gold bullion traded in a sideways pattern for most of September before dropping sharply on the last day of the month. Silver, true to its high volatility nature, had a more significant trading range ($18.40 to $17.04). Gold positioning only had a slight pullback which was most likely profit-taking given the relatively small amount. Some hedging occurred likely as well.

Gold bullion remains in its uptrend from its 2018 summer low. The short-term pattern appears to be another consolidation phase. The main inputs in our gold bullion model all show long-term trends unchanged. All factors that we consider to be significantly correlating to gold bullion indicate that we are still in the early stages of a major long-term advance. After a very sharp rise, we see this correction as short term in nature.

Figure 1. Gold Correction is Likely Short Term

Gold Bullion Price
Source: Bloomberg as of September 30, 2019.

Our measure of CFTC net gold bullion plus known gold bullion ETF holdings reached an all-time high since we last published this chart. Accumulation remains steady, given that the long-term direction of yields remains lower, growth indicators continue to weaken and macro risks remain elevated and trending higher.

Despite the gold price consolidating in September, investors continued to aggressively increase their positions. This buying, combined with the 5Y/5Y inflation swap rolling over is very convincing to us. Our view is that gold should continue to move higher, in both the medium and long term.

Figure 2. Buyers Push Gold Positions to All-Time High

Gold Holdings Reach High
Source: Bloomberg as of September 30, 2019.

The Eventful Month That Was: The Macro View

The U.S.-China trade war continued to escalate in September. On September 1, the U.S. imposed a 15% tariff on $112 billion of Chinese consumer goods imports, and China began rolling out tariffs on the previously announced $75 billion of U.S. goods. The U.S. ISM Manufacturing Purchasing Managers Index (PMI)4 fell into contraction territory at 49.1 versus a 51.3 consensus estimate, a big miss (a reading above 50 indicates expansion, while a reading below 50 indicates contraction).

The OECD (Organisation for Economic Co-operation and Development) cut its forecast for global growth from 3.3% to 2.9% for 2019, and from 3.4% to 3.0% in 2020 ― the lowest yearly growth rates since the GFC (global financial crisis). The OECD also noted that downside risks continued to grow, citing the impacts of U.S.-China trade tensions and a no-deal Brexit. Despite the negative news, however, risk assets had a very sharp reversal higher. The news catalyst was a rumor that China and the U.S. would meet in October to resume trade talks. But we believe the more likely catalyst was China’s reserve requirement ratio (RRR) cut amounting to about $126 billion to help shore up its weakening economy. This cash injection, however, is unlikely to boost the overall Chinese economy as liquidity is already plentiful; it is the growing pressure from the escalating trade war and sluggish domestic demand that are sapping business and consumer confidence. What the RRR cut did have was an impact on overall market credit liquidity, and this was a factor for the risk-on rotation.

Central Bankers Continue to Fuel Easy Money

As the OECD noted, global growth remains weak. As expected, the ECB (European Central Bank) announced a new QE (quantitative easing) program of 20 billion Euros per month in asset purchases for an indefinite period starting November 1, a lowering of deposit rates by 10 basis points to -0.50%, and a call for more fiscal stimulus from EU countries. The ECB also reiterated its inflation targeting goal, to which we remain highly skeptical. The U.S. FOMC (Federal Open Market Committee) meeting occurred the following week, September 18, with the Fed cutting Fed Fund Rates by another 25 basis points, to a range of 1.75% to 2%. Guidance and language were mostly in line with consensus.

In mid-September, Saudi Arabia’s main oil processing facility was attacked, resulting in a loss of approximately 5.7 million barrels a day of oil production. The price of crude shot up dramatically, reflecting the significant near-term loss of oil output and most likely finally pricing in the geopolitical risk premium into the crude pricing strip. The main impact for gold would be via lower interest rates as climbing crude prices will act as a higher tax on a global economy that is already slowing rapidly.

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