Last week, the continuous gold futures contract fell to under $1,830 per ounce, the lowest level since March 2023. In a September 1 Barchart article, I wrote:
Time will tell if a BRICS currency lifts U.S. dollar gold prices. Meanwhile, gold’s role in the financial system is rising. Central bank buying and holdings validate gold as the ultimate currency and hard money. While governments can issue fiat money to their heart’s content, the worldwide gold stock is limited. The U.S. national debt, inflation, and the potential for an emerging currency that uses gold to derive value could cause the bull market to climb to higher highs over the coming years. A BRICS currency should be a bullish development for gold and gold-related assets.
December gold futures were trading at the $1,966 per ounce level on September 1. At the end of Q3 on September 29, the price settled over 5% lower at $1,866.10 per ounce, $99.90 below the level at the beginning of the month. In October 2, the price was lower at the $1850 level. Gold looks ugly, but the long-term trend tells us the bull market is nowhere near over.
The double-top was a bearish technical formation
Gold has made lower highs and lower lows since the price failed to make a higher high in May 2023.
The monthly chart illustrates the $2072 double top from March 2022 and May 2023. Over the past four months, gold declined, falling 3.28% in Q3 and closing at the $1866.10 level on the December COMEX futures contract. Meanwhile, nearby gold futures were still 2.18% higher than the 2022 closing level on September 29, 2023.
Rising interest rates have weighed on gold
Carnage in the U.S. bond market weighed on gold over the past months. While the short-term Fed Funds Rate rose only 25 basis points in Q3 to 5.375%, quantitative tightening continued, pushing rates higher further on the yield curve.
The 30-year U.S. government Treasury bond futures chart highlights the decline to a 112-09 low in early October, the lowest level since November 2007. Rising interest rates attract capital from other markets as fixed-income products offer rising yields. Moreover, higher interest rates increase the cost of carrying inventories, weighing on gold and other commodities.
A stronger dollar index has added to the selling
In what was a double whammy for gold in Q3, the U.S. dollar index rose 3.15% and was 2.47% higher over the first nine months of 2023.
The dollar index bounced higher after probing below the 100 level for the first time since April 2022 in July 2023. A rising U.S. dollar tends to be bearish for gold prices.
The long-term trend remains firmly intact
Since the turn of this century, every correction in gold prices has been a golden buying opportunity.
The COMEX gold futures chart dating back to the 1970s shows the 1999 $252.50 low marked a bottom for the leading precious metal. For nearly a quarter of a century, pullbacks in gold prices have been ideal for buyers.
Gold remains the ultimate hard currency, with central banks and governments validating gold’s role in the global financial system. Central banks have been net buyers of gold over the past years, adding to reserves. Meanwhile, the prospects for a BRICS currency to challenge the U.S. dollar’s dominant role is another supportive factor for the yellow metal. BRICS countries could back their currency with gold, increasing the metal’s profile in international financial transactions over the coming years.
Buying gold on weakness remains the optimal approach
While rising interest rates and a strong U.S. dollar index have sent gold prices over $200 lower since the May 2023 high, gold’s bull market remains firmly intact. A move below $1,600 would jeopardize the nearly two-and-one-half-decade bullish trend, but that seems unlikely.
Markets reflect the economic and geopolitical landscapes, supporting higher gold prices as we head into Q4 2023 and beyond. I remain a scale-down buyer, adding to long positions. Since bull markets rarely move in straight lines, corrections can take prices to illogical, irrational, and unreasonable levels. Leave plenty of room to add on further weakness. Buying gold during corrections has been the optimal approach for decades, and I expect that to continue over the coming months and years. The current selloff is another temporary event on the path to higher highs in the rare precious metal.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
