Gold Market Overview: Q3 2023
In September, the value of gold sharply declined, reaching its lowest point in over six months for the third quarter of the year. This drop was caused by major changes in market expectations for the future monetary policies of the Federal Reserve. As a result, the dollar and bond yields hit record levels.
The trend is bearish
According to an analysis by Gold Billion, spot gold ended trading in September at $1,848 per ounce, which was a 4.7% decrease from the previous month. This decline marked the second consecutive monthly decrease and a third-quarter decline of 3.7% after a 2.5% drop in the second quarter.
In September, the value of gold decreased by $91, and in the past week alone, it dropped by nearly 4%, resulting in a total decrease of $77. Gold prices experienced a five-day consecutive decline, which is the longest downward streak since mid-June. This marks the largest weekly drop in almost two years.
According to Gold Billion’s technical analysis, the price of gold experienced noteworthy changes in September. This includes the breaking of the psychological support level at $1,900 per ounce, which had been maintained since mid-August. Last week, gold closed below this level, at $1,848 per ounce.
The influence of the Fed
In September, there was a big sale of gold due to changes in the market’s predictions about the Federal Reserve’s monetary policy. Although the Fed kept interest rates between 5.25% and 5.50%, as expected, it also suggested that the rates would remain high for a longer period of time. This led to expectations of smaller rate cuts in 2024, compared to previous predictions.
Additionally, Federal Reserve Chair Jerome Powell hinted that interest rates could increase at least once this year, which was a much more strict stance than what the market was anticipating.
According to Gold Billion’s analysis, it is expected that the US interest rates will remain high for a longer period, which will continue to put pressure on gold in the upcoming months. The increase in interest rates results in a higher opportunity cost of investing in non-yielding assets such as gold.
The Federal Reserve’s “Dot Plot” projections, which are released every three months, show a projected 5.6% increase in interest rates during 2023. This suggests the possibility of additional rate hikes throughout the rest of this year. The projections also indicate a decline in interest rates to 5.1% in 2024, which would mean only two rate reductions during that year. This is different from the market’s expectation of four rate cuts in the upcoming year.
Bond yields and the US dollar got stronger
During September, the Federal Reserve’s new expectations caused significant changes in the economy. This led to a sharp rise in both government bond yields and the dollar’s value, which is measured against a group of six major currencies.
The dollar index increased by 2.2%, reaching its highest point in ten months at 106.524. This marks the second consecutive month of dollar growth and an 11-week continuous rise, which represents the longest period of dollar gains in decades. The dollar index managed to break the 105 level and achieved two consecutive weekly closes above it. It also breached the 106 level but retraced to close below it.
In September, there was a significant increase in bond yields, specifically the 10-year bond yield which rose by 11.3%. This brought it to its highest level in 16 years at 4.688%. The yield has been increasing for the past five months. Last week, it closed above 4.5%, marking four weeks in a row of gains and remaining at high levels.
The strength of the US dollar and the rise in bond yields to elevated levels contribute to the negative pressure on gold, which does not provide a yield compared to bonds. Additionally, the strength of the US dollar forces gold to decline due to the inverse relationship between them, as gold is priced in dollars.
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