Gold displays a negative correlation to US real interest rates, meaning that lower Fed interest rates are supportive for the gold price. The Fed's latest decision was not unanimous, which means that further rate cuts are not a given. At the margin this is a mild negative for gold prices and it means they may dip in the short term.
US–China trade relations have stopped deteriorating; US President Donald Trump did not implement the latest tariff increase that was scheduled and the two sides are negotiating once again. This suggests that there is little aggressive upside pressure for gold price increases in the short term. If the US and China come to a trade agreement before the end of the year, this can lead to a drop in gold prices to levels of around USD 1,420 per ounce. We believe this will be a good buying opportunity for longer-term investors as the outlook for gold remains highly constructive. The price is being further supported by the fact that central bank gold reserves as a percentage of total reserves are at multi-decade lows. Also, interest rates around the world have declined and will likely continue to do so. We note the ECB cut its deposit rate to -0.5% at its September meeting and indicated that it will increase its QE programme if it deems this necessary.
The combination of negative deposit rates and the prospect of further QE is highly supportive for the gold price. Indeed, if retail banks begin to charge depositors to hold cash we believe this will lead to significant retail client interest in gold over the coming months and years.
Gold will also benefit from any increase in geopolitical risks, of which there are many. The US–China trade quarrel is one aspect in a broader US policy of trying to contain China, and this is unlikely to be the last time we see friction between the two countries. Furthermore, if tensions in the Middle East continue to deteriorate then gold should perform well as a safe-haven asset. Consequently, it makes a lot of sense to have gold in any portfolio, despite the short-term risk of a modest decline in the gold price.
Peter Kinsella
Global Head of Forex Strategy