The price of gold recovered strongly from the sharp fall in the first month of autumn in October, indicating strength. Both the fall in US government bond yields and the worsening of geopolitical tensions in the Middle East contributed to the spot price increase.
The spot price of gold rose by a total of 7.4 percent in October to 1,983.6 dollars per ounce. There has been some decline in the first week of November, and at the time of writing, an ounce is trading at $1,968.
Geopolitical risk and tensions in the Middle East and the milder tone of central banks in terms of interest rates helped gold recover in October.
V-shaped Price Base
The October price increase came after a sharp selloff in September. The chart shows that gold formed a so-called V-shaped bottom in the first few days of October, a situation where, after aggressive selling, recovery to previous levels occurs at a rate comparable to falling.
Meanwhile, gold reached $1,810 an ounce in early October and showed great weakness. As usual, it takes time to recover from such a sharp fall, so such a quick recovery in turn shows strength; buying interest was significant at the support level of $1,800.
Chart 1: Gold Spot Price
Gold fell in September due to the rapid increase in bond yields and speculation that interest rates may remain at a higher level for longer than expected.
However, several short-term trends changed in October. The rapid increase in bond yields stopped, and yields began to fall instead. The yield on US 10-year bonds reached 5 percent in early October, the highest level since 2007. However, by the beginning of November, the yield had fallen back to 4.56 percent.
Higher bond yields increase the opportunity cost of gold (forgone income from choosing one investment over another). In addition, the United States dollar has depreciated compared to the peaks reached in early October. Before that, the dollar had strengthened rapidly for almost three months in a row.
Geopolitical Tensions Escalated
Geopolitical events also have a significant impact on the price of gold. In early October, the Palestinian resistance organisation Hamas launched unprecedented attacks against Israel, during which 5,000 rockets were fired from the Gaza Strip into Israeli territories. Hundreds of Hamas fighters also entered Israeli territory and took scores of hostages.
On October 13, Israel urged Gazans to leave the area, the same day the price of gold rose 3.5 percent. Since then, there have been several attacks on the Gaza Strip, killing more than 10,000 people.
The price of gold has risen primarily because investors fear the conflict will escalate and spread to other countries. In general, geopolitical events have had a short-term impact on gold prices. However, if the conflict were to continue, constantly threatening the stability of the region, it could also be expected to provide longer support for the price of gold. You can read more about the effect of geopolitics on the price of gold here.
The Federal Reserve Left Interest Rates Unchanged
The monetary policy and rhetoric of central banks in the global economy have a significant impact on the price of gold in the short term. At the Federal Reserve meeting in early November, the central bank decided to leave the base interest rate unchanged at 5.5 percent.
If earlier it was speculated that there might be another interest rate hike in the US this year, now more and more bets are being placed on the fact that it will not happen. The central bank’s rhetoric was somewhat more modest than before in October and early November, which has had a positive effect on gold.
Central Bank Governor Jerome Powell said that the current situation is in some ways a “conundrum” and that monetary policymakers are willing to raise interest rates if inflation does not continue its slowing trend. The central bank governor said they are not sure whether interest rates have been raised enough or not.
Nonetheless inflation pressures continue to run high, and the process of getting inflation back down to 2pc has a long way to go
Jerome Powell, The Fed Chairman
In September, the Federal Reserve’s inflation indicator registered an annual increase of 3.4%. Inflation has essentially remained at the same level for three months in a row.
The US economy grew by 4.9 percent in the third quarter, but there are signs that high interest rates are dampening economic growth and economic activity in the world economy. For example, new mortgages have fallen to a 28-year low, while interest rates on the same loans have risen to a 25-year high. A decrease in the amount of money in the economy also indicates a decrease in economic activity.
The Technical Picture Has Strengthened
Looking at the technical picture, a strong resistance level is currently at the $2000 level, which is also psychologically important. The next resistance is already at 2070–2080 dollars, where the price of gold has been three times higher in the last more than three years. The previous price records are also from there. If the $2,000 level is breached, gold could quickly challenge previous highs.
Gold also has several support levels in the $1,900–$1,950 range. An even stronger support level now lies at $1,800–1,810, where gold bounced back from in early October.
The rise in silver prices was somewhat more modest in October. An ounce rose 3.1 percent to $22.85. The price ratio of gold and silver has also increased – to get one ounce of gold, 87 ounces of silver have to be extracted.
Historically, the price ratio of gold to silver is currently high, meaning that silver is undervalued relative to gold. When precious metals are in a bullish period, this ratio usually falls instead. Since the price of gold is in a long-term upward trend, it is likely that this ratio will also start to decrease, which means that silver will become more expensive compared to gold.