Stock Market: The strange case of falling gold prices

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This would be the perfect time to own yellow. The yellow metal has historically appreciated when inflation is high, as it is a physical investment that can act as a store of value. It is also often a favorite in times of geopolitical uncertainty, when it is seen as a safe haven.

But the price of gold has not yet risen. In fact, they are down nearly 20% from the recent March peak. That puts gold at the top of the bear market.

Warren Patterson, head of commodity strategy at ING, told me: “Investors don’t have much interest in holding gold in the current environment.

Break it: Gold prices spiked in early March due to concerns about the consequences of Russia’s invasion of Ukraine. Since then, however, other market dynamics have emerged.

Call it the Fed effect. The central bank has aggressively raised interest rates in an effort to reduce inflation, which remains high, especially as the war in Ukraine drives up food and energy prices.

The Federal Reserve raised interest rates on Wednesday to 3/4 percentage point for its third consecutive meeting, an unprecedented move. It also signals that a significant increase in November and December is possible.

That action pushed the US dollar to new two-decade highs. The greenback has gained 16% against a basket of major currencies this year, a huge gain.

Those developments have been hurting the stock. But they also affect gold.

That’s partly because commodity transactions, including gold and other precious metals, often take place in dollars. A stronger currency makes it more expensive for foreign investors to buy and can reduce demand, driving prices down.

Another factor is the effect of the Fed’s tough bull cycle on US Treasuries. Yields on these bonds, which move inversely with prices, jumped as the Fed tightened policy. Yields on benchmark 10-year US Treasuries last at 3.77%, up from about 1.5% at the start of the year.

Gold also competes with government bonds as a safe-haven investment. And while investors can get better returns from the latter, the former looks much less attractive.

Patterson put it this way: “If you’re raising interest rates, what do you want to hold, gold or something that will give you a yield?”

Signs of the Times: This week made it clear that central banks have no plans to change their strategies anytime soon, making inflation control a priority.

After the Fed announced its latest rate hike, others followed suit. Bank of England pushed rates in the UK to its highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland also all increased.

That means gold is unlikely to rise again in the near term. For that to happen, the picture of inflation will need to change, Patterson said.

“It really went home this week,” he said. “You’re seeing widespread monetary tightening from most central banks out there.”

British pound plunges on Friday after UK government announced efforts to rescue the economy from the recession with a plan that involves tax cuts, the removal of bankers’ bonus limits and an increase in multiple loans.

This is only there: Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth”.

He said the government would cut personal income taxes and cancel plans to raise business taxes next spring. At the same time, Kwarteng said the government will push ahead with a scheme to subsidize energy bills for millions of households and businesses.

But the UK will need to issue significant additional debt to finance the scheme, worrying investors. Britain plans to borrow $82 billion more than forecast in spring, the Treasury said.

The measures come just a day after the Bank of England warned that the country was likely to slip into recession for raising interest rates for the seventh time since December last year, part of an effort to contain it. Inflation is taking a profound toll-crisis of life for millions of people.

Investors were concerned that the country was spending beyond its means. The Institute for Fiscal Studies warned in a report Wednesday that government borrowing is “the unsustainable path”.

Investor Insights: The pound fell nearly 2% to $1.10 on Friday following Kwarteng’s announcement, hitting its lowest level since 1985.

British government bonds also sold off sharply. The yield of 10-year bonds is close to 3.78%. It starts the year under 1%.

When people are looking at their wallets, they are more inclined to hunt for transactions. That means they’re headed to Costco

where they can buy items in bulk at cheap prices.

The company said on Thursday that revenue for its most recent quarter, which ended in August, rose more than 15% to $72 billion.

What does Costco see? Richard Galanti, the company’s chief financial officer, said there was “a bit of light at the end of the tunnel” about the price hike.

When talking to the company’s extensive network of suppliers, there are indications that costs are coming down. For example, manufacturers of outdoor furniture and barbecues are benefiting from lower steel prices. Container shipping costs have also been reduced, and crates are easier to find.

“At least we’re seeing things – starting to go – in the right direction,” Galanti said.

Meanwhile, Costco plans to leverage its size to stay price competitive and continue to grow sales. The cost of membership will remain the same, but could increase in the future if needed, Galanti said. Competitor Sam’s Club recently increased its membership fees.

“We kept that arrow in the vibrator as we moved forward,” says Galanti. Shares fell 3% in pre-market trading.

The US Purchasing Managers’ Index for September, which provides a look at the health of the manufacturing and services sectors, is posted at 9:45 a.m. ET.

Coming up next week: The third quarter is over. The S&P 500 has lost 0.7% since the beginning of July. That signals ongoing uncertainty, but would mark an improvement from the 16% loss recorded in the second quarter.

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