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Gold Hits Two Week High As Uncertainty Grows

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by GoldCore
Thursday, Oct 12, 2023 - 14:20
Gold Hits Two Week High As Uncertainty Grows

Overnight the gold price hit a two-week high. One of the ‘supports’ for the gold price was the release of FOMC minutes yesterday, something that once upon a time would have done a bit of a number on the price of gold.  Instead, it barely blinked. The metal also finds itself well supported on account of the tragic events in the Middle East. 

FOMC Release

Wednesday’s release of last month’s FOMC minutes showed that many members are keen to tread carefully when it comes to further rate hikes. The minutes suggested that we will see higher rates for longer as monetary policy is likely to remain restricted for some time. Interestingly when the minutes were written the majority of members expected to see another hike in rates. But, this was before the bond sell-off of the last fortnight. This tightening in financial markets may have begun to do the job for the FOMC, and may prevent them hiking again. 

Middle East

For the second time in less than two years we write this blog against a backdrop of headlines about a war that has already destroyed thousands of lives and will no doubt affect even more for years to come. 

There are two ways markets try to read wars - one is how it will affect demand and supply for goods, such as weapons and oil. The other is what its implications are for global stability. Unlike demand and supply, this is not quantifiable, and it is very uncertain. This is about what these wars mean - Do they reflect more instability in the coming months and years? Do they mean there could be a change in a power dynamic between nations? Are they a precursor to an even bigger war - as we saw when Germany invaded Poland, triggering the start of the Second World War. 

Gold Down $100? This Really Shouldn’t Be A Surprise

Any war in the Middle East reaches beyond its physical location. The nature of the diplomatic relationships and alliances between the West, the East and the Middle East means it is a given that a war in the likes of Israel is sadly a proxy war for one between much bigger powers. What the implications of these latest events will be, no one can tell. It is for this very reason that we expect the likes of gold to do well in the coming months and years. 

Is Gold The Only ‘Luxury’ Anyone Will Soon Be Buying?

Yesterday French luxury conglomerate LVMH was feeling pretty budget after reporting that sales growth was down this quarter. Its stock fell by 7% and the overall price is down by nearly a quarter since April. It was a tough day for the company that just a few months ago had been the first European company to boast a market value of $500 billion. 

In recent months the luxury goods industry has been confident that sluggish sales growth in the West will be easily compensated by sales growth in China, since it lifted its pandemic restrictions. However, this hasn’t come to fruition. Analysts are now warning that we can expect to see a ‘normalisation of growth across all countries’. A nice way of saying China’s struggling as much as everyone else. 

 

Why does this matter? Like new car sales, luxury goods sales are an excellent indication of where consumer confidence is. Yes, it’s just sales growth that is down (rather than actual sales) but if less people are joining the luxury market, or less people are expanding upon their usual spending then this is a slow turn towards changing long-term habits. Consumers are questioning if handbags and fine wines are really where they want their money long-term. 

As much as the likes of Hermes or Rolex (and my wife) would like to have you believe that their products are ‘investment pieces’ the truth is that no one is rushing to buy them when the proverbial economic sh*t hits the fan. As economic times get tough we turn to assets that are both faceless and borderless. No one relies on gold still being in fashion, there’s no Birkin equivalent to a gold bar. It’s just gold. It’s simple. Like designer accessories it's a great way of getting your money out of a country without leaving the country but it is timeless and doesn’t rely on Vogue or this week’s ‘it’ model to tell you that it’s in fashion. 

Expect to see more gold demand in China as funds are diverted out of Hermés purses and into gold coins and bars. 

Speaking of gold demand

We are still awaiting IMF numbers but the World Gold Council’s Krishan Goupal put out some interesting tweets this week concerning central bank gold demand. Goupal highlighted September purchases from the central banks of China, Poland and India. Poland’s gold may reach 20% of their total reserves (following comments from the President of the National Bank) whilst China’s total gold purchases this year are now 181t. 

It’s information such as this that is really forming solid support for the gold price. The release of FOMC meeting minutes is one thing, but they’ll be tomorrow’s waste paper. Physical gold purchased by central banks who are otherwise touting the benefits of fiat currency, is a whole other ball game. 

 

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