Gold: Price decline seen as excessive – Commerzbank

Commerzbank’s Carsten Fritsch notes that the Gold price dropped 3.7% on Friday to USD 3,870 per troy ounce, extending October’s loss to almost 7%. He links the sell-off to forced liquidation by investors as equities corrected, and argues fundamentals such as high US public debt and constrained Fed tightening still support a higher Gold price over the coming months.

Forced selling and debt dynamics

"The gold price fell by 3.7% on Friday to USD 3,870 per troy ounce, its lowest level in more than a year. This resulted in a substantial monthly loss of almost 7% in October, which was even slightly larger than that recorded in September."

"Given the robust US economy and inflation running well above target, a further rate hike in December is highly likely. Expectations of rate hikes have led to rising bond yields and (real) interest rates, which in turn increase the opportunity cost of holding gold and, conversely, reduce the attractiveness of holding gold."

"However, this can only explain the current fall in the price of gold to a limited extent. This is because, following last week’s Fed meeting – at which, as expected, the Fed left interest rates unchanged – interest rate expectations have eased and both nominal and real bond yields have subsequently fallen."

"We consider the price decline in gold to be excessive and unwarranted. The arguments in favour of a rising gold price remain valid."

“Higher interest rates would cause debt servicing costs to rise further. This also explains US President Trump’s desire for lower interest rates. Even though the Fed has resisted this, it is unlikely to be able to raise interest rates by as much as would actually be necessary to combat high inflation, given the debt problem mentioned above. Such a scenario points to a higher gold price.”