Gold has pushed higher after initially opening lower, moving back above its 50 day exponential moving average as US Treasury yields eased from the psychologically important 5% level.
The move comes as markets continue to assess the direction of global interest rates and what higher borrowing costs could mean for the US and broader global economy.
For Australian investors holding physical gold, the latest price action is another reminder that gold does not trade in isolation. Interest rates, inflation, government debt, currencies, employment and economic growth can all influence sentiment towards precious metals.
Gold Moves Back Above Its 50 Day EMA
Gold has spent much of the past several weeks trading within a relatively broad consolidation range. The latest rally has pushed the metal back above its 50 day EMA, an indicator closely watched by traders.
However, momentum remains relatively restrained and the 50 day and 200 day averages are both relatively flat.
That suggests the market is still working through a period of consolidation rather than establishing a clear new short term trend.
The US$4,500 per ounce level also remains an important area for the market. If gold approaches that level, investors and traders will be watching closely to see whether buying momentum can carry prices through it or whether the market continues to move sideways.
For physical bullion holders, however, short term technical levels are only one part of the bigger picture.
US Bond Yields Remain Important
One of the factors supporting gold has been the recent retreat in US Treasury yields.
The US 10 year Treasury yield has moved back from the 5% area, which is significant because higher bond yields can increase the opportunity cost of holding a non income producing asset such as gold.
When yields fall, that pressure can ease.
The relationship is not always straightforward, but changes in interest rate expectations remain an important driver of gold prices.
At the same time, central banks around the world remain on different paths.
The Federal Reserve’s recent decision and commentary have kept markets focused on the possibility of further changes to US interest rates, while the Bank of England has held rates steady. Attention is also turning towards the Bank of Japan and its next policy decision.
The result is a global interest rate environment that remains uncertain.
US Employment Remains Relatively Strong
The latest US employment data provided another important piece of the puzzle.
Initial claims for unemployment benefits came in at 196,000 for the week ending September 12, below economists’ expectations of approximately 208,000.
The previous week’s figure remained at 206,000.
The four week moving average was 203,250, compared with expectations of 206,000.
Continuing claims also came in below expectations at approximately 1.730 million, compared with forecasts of 1.780 million.
The numbers indicate that the US labour market remains relatively resilient, despite the significant increase in borrowing costs experienced over recent years.
For gold, stronger employment data can sometimes reduce expectations for lower interest rates, while weaker economic data can have the opposite effect.
This is one reason gold can experience significant short term volatility as each major economic release changes market expectations.
Housing Data Provides Another Warning
While employment data remained relatively firm, the latest US housing figures were weaker.
Housing starts fell 2.6% to an annualised rate of 1.275 million units, below the expected 1.310 million.
Building permits also declined 2.7% to 1.394 million, compared with expectations of approximately 1.410 million.
Housing is particularly sensitive to interest rates because higher mortgage and financing costs can discourage both buyers and developers.
The combination of resilient employment and weaker housing activity highlights the mixed signals currently coming from the US economy.
The Bigger Gold Story Is Debt
Short term movements in gold can be driven by interest rates, employment figures, bond yields and technical levels.
But there is another issue that physical bullion investors should not overlook:
Global debt continues to grow.
Governments around the world have accumulated enormous levels of debt, while servicing that debt becomes more expensive when interest rates remain elevated.
This creates a difficult environment for policymakers.
Higher interest rates can help combat inflation, but they can also increase the cost of servicing government debt and place additional pressure on households, businesses and financial markets.
This is one reason gold’s longer term role remains relevant.
Gold does not depend on a government, bank or company promising to repay a debt. Physical gold is an asset that exists outside the banking system and has been used as money and a store of wealth for thousands of years.
Gold Does Not Need to Rise Every Day
It is important to remember that gold does not move in a straight line.
Periods of consolidation are normal, particularly after a substantial move higher.
The current market is showing some renewed strength, but short term momentum remains uncertain. The US$4,500 area represents another level that the market will need to contend with, while movements in Treasury yields and expectations for central bank policy will continue to influence sentiment.
For someone accumulating physical bullion, however, attempting to predict every short term movement can miss the bigger objective.
A regular accumulation strategy can mean buying through rising markets, falling markets and periods when gold simply moves sideways.
Physical Gold Is About the Long Term
At FirstGold, we believe the purpose of owning physical gold and silver is not to predict tomorrow’s price.
It is about gradually building an asset outside the traditional financial system.
Whether gold is trading at US$4,300, US$4,500 or temporarily lower, the fundamental reasons people own physical bullion remain.
Gold is not bought to get rich. Gold is bought to help stay wealthy.
For Australians, physical bullion can also provide diversification from Australian dollars, property, shares and other financial assets.
The latest market movements are a reminder that interest rates and economic conditions can change quickly.
The long term question is therefore not simply “Where will gold trade next week?”
It is:
“How much physical gold and silver will you own when the next major financial cycle arrives?”
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Disclaimer: This article is general information only and does not constitute financial advice. The value of precious metals can rise and fall, and past performance is not a guarantee of future results.
