Weekly Commodities Review - 8 September

Macro overview: commodities

Today, in the first of our weekly commodity market reviews, we are taking a long-term perspective on one of the major markets: gold.

The dominant focus for global markets remains inflation. In order to combat record inflation rates, central banks across the globe have been hiking rates, and they are expected to continue to do so for the next quarter or two.

Historically higher interest rates damage gold prices as they create a greater opportunity cost for not keeping funds in cash, which would otherwise earn interest. So even though gold has traditionally been seen as an inflation hedge, if rates increase sharply then the price can still come under pressure.

The monthly chart below highlights how gold powered higher from the lows at the start of the new millennium. From lows under $300 to highs topping out above $2000. Price action has recently dropped back to the long-term trend line (black line on the chart). When looking at charts where price action moves much more than 100 percent it is often instructive to use logarithmic scales on the Y axis to put the moves into perspective.

On a standard linear axis the recent falls in price action from the all-time highs above $2000 down to $1700 can look quite significant. On the other hand, on the logarithmic chart the moves can be seen as less considerable and appear instead as a “simple” move down to the longer-term trend line.

Will this longer-term positive trend regain control?

A key question is: have further interest rate hikes now been largely priced in?

Over this longer timescale it is possible to see gold slipping a little lower down to this longer-term trend in the next month or two. Over the longer term, however, such relative minor weakness could be seen as an interesting investment opportunity.

Any future moves down to the long-term trend could allow buying interest to gather momentum, as the inflation hedge properties of gold could then increasingly move to outweigh the near-term concerns over higher interest rates.

‍