Gold Monthly Review
Overall, even after gold prices in USD-terms (XAU/USD) finished the week higher by 0.14%, it still closed the month lower by -3.21% overall. The main factor in gold’s weakness the past month were the dramatic pullback in Federal Reserve interest rate cut odds due to perceived progress towards a US-China trade war Phase 1 deal. To this end, gold prices may start December on stronger footing.
Gold Prices Rally After Trump Signs Hong Kong Bill
Gold prices turned higher at the end of November thanks to news breaking that US President Donald Trump would be signing a bill aimed at showing support for protestors in Hong Kong. With China insisting on its “two systems, one country” style of governance with respect to Hong Kong, the move may be seen as an unnecessary provocation (granted: the bill passed through the US Congress with such overwhelming support, it was veto proof, so US President Trump had no choice to sign the bill).
Moving forward, the best news possible for gold prices on the trade war front would be if the US-China trade war Phase 1 deal falls apart before the end of the year.
Gold’s Relationship with Inflation to be Significant Moving Forward
The environment of uncertainty around the US-China trade war Phase 1 deal has pushed G10 currencies’ central banks into a “race to the bottom” – central banks from all around the world are cutting rates towards zero, and in some cases, into negative territory. As uncertainty persists for global trade, central banks are unlikely to raise rates. This may help gold prices avoid too significant of a downturn.
The fall in global bond yields coupled with signs that inflation is turning higher amid persisting global trade concerns underscores one of the key factors that tends to help gold prices rally: environments that produce falling real yields tend to be the most bullish.
Real yields are inflation-adjusted yields: for example, the US Treasury 10-year yield minus the headline inflation rate. Falling real US yields means that the spread between Treasury yields and inflation rates is decreasing (for example: the US Treasury yield falls and inflation rises). If gold yields nothing (no dividends, coupons, or cash flows), it would logically follow that it would benefit in environments when US real yields fell.