This week’s drop in the gold price has spooked many investors, says money manager Adrian Day, who provides his perspective on the volatility.
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Let’s cut to the chase: we do not think the drop in gold earlier this week marks the end of this bull market. Why did gold drop? First, I think it’s fair to say that, technically, gold was looking increasingly vulnerable over the past several weeks. Many new-time buyers were getting nervous. Against that background, it did not take much for gold to fall.
Interest rate talk again
The “collapse” in the gold price has been attributed to hawkish comments from Fed officials. This contributed to the negative sentiment, but in reality it is much sound and fury, signifying nothing. These two Fed officials are well known to be hawkish, and the market was in any event already expecting a rate increase before the end of the year. This was nothing new. Moreover, William Dudley, president of the influential New York Fed, had the day previous urged caution in raising rates. Why did not that have a positive effect on gold? Because the sentiment had shifted.
Equally important, I believe, was the rally in the dollar, only partially attributable to the Fed comments. The British pound fell sharply again (following a “hard-Brexit” talk by the Prime Minister), as did the yen, on concerns about the efficacy of the National Bank’s policies.
Stay the course; it’s early days yet
The fundamentals remain intact. Monetary and interest rate policy remain very loose around the world, and that would remain true after the Fed increases the Fed Funds rate another one-quarter percent. Last year, gold fell sharply into the expected rate increase, and dropped further when the cut was announced, then immediately reversed and moved up. The same could occur this …read more