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It should be the perfect time to own gold. The yellow metal has historically risen when inflation is high because it is a physical investment that can serve as a store of value. It is also usually a favorite during periods of geopolitical uncertainty, when it is seen as a safe haven.
But the gold price has not risen. In fact, they are down nearly 20% from their recent peak in March. That puts gold on the brink of a bear market.
“In the current environment, investors don’t have much appetite to hold gold,” Warren Patterson, ING’s head of commodities strategy, told me.
Breakthrough: Gold prices skyrocketed in early March as fears mounted over the fallout from Russia’s invasion of Ukraine. Since then, however, other market dynamics have emerged.
Call it the Fed effect. The central bank has aggressively raised interest rates in an effort to curb inflation, which remains stubbornly high, especially as the war in Ukraine pushes up food and energy prices.
The Federal Reserve raised interest rates by three-quarters of a percentage point for the third consecutive meeting on Wednesday, an unprecedented move. It also indicated that significant hikes could be on the table in November and December.
That move pushed the US dollar to a new high in two decades. Against a basket of major currencies, the greenback is up 16% so far this year, a huge gain.
Those moves have hurt stocks. But they also corrode gold.
That’s partly because transactions of commodities, including gold and other precious metals, are usually in dollars. A stronger currency makes it more expensive for foreign investors to buy, and can reduce demand, pushing prices down.
Another factor is the effect of the Fed’s heavy rate hike cycle on US Treasuries. Yields on these bonds, which move opposite prices, have risen as the Fed tightened its policy. The return on the US 10-year benchmark stood at 3.77%, up from around 1.5% at the start of the year.
Gold also competes with government bonds as a safe-haven investment. And when investors can get better returns on the latter, the former looks much less attractive.
Patterson put it this way: “If you raise interest rates, what would you rather hold, gold or something that’s going to give you returns?”
Sign of the times: This week made it clear that central banks have no intention of changing course any time soon, with the task of controlling inflation becoming their priority.
After the Fed announced its latest rate hike, others followed. The Bank of England pushed interest rates in the United Kingdom to the highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland also all rose.
That means gold is unlikely to make a comeback anytime soon. For that to happen, the picture of inflation would have to shift, Patterson said.
“It’s really been a hit this week,” he said. “You see monetary tightening across the board from most central banks out there.”
The British pound collapsed on Friday after the British government announced its attempt to rescue the economy from recession with a plan that includes cutting taxes, lifting a cap on bank bonuses and significantly increasing loans.
This just came in: Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth”.
He said the government would cut income taxes and cancel plans to raise business taxes next spring. At the same time, Kwarteng said the government would continue plans to subsidize the energy bills of millions of households and businesses.
But the UK will need to issue significantly more debt to fund this plan, which worries investors. The country plans to borrow $82 billion more than it forecast in the spring, the British Treasury said.
The measures come just a day after the Bank of England warned that the country was likely already in recession as it hiked interest rates for the seventh time since December last year, as part of an effort to tame inflation that has left a deep cost. caused. life crisis for millions of people.
Investors were already worried that the country is spending too much. The Institute for Fiscal Studies warned in a report Wednesday that government borrowing was on an “unsustainable path.”
Investor Insight: The pound fell nearly 2% to $1.10 on Friday after Kwarteng’s announcement, hitting its lowest level since 1985.
British government bonds also sold off sharply. The yield on the benchmark 10-year bond is almost 3.78%. It started the year below 1%.
When people watch their wallets, they are more likely to hunt for deals. That means they’re headed to Costco (COST), where they can buy items in bulk cheaply.
The company said Thursday that revenue for its most recent quarter, which ended in August, rose more than 15% to $72 billion.
What does Costco see? Richard Galanti, the company’s chief financial officer, said there is “a little light at the end of the tunnel” for price increases.
In talks with the company’s extensive network of suppliers, there are signs that costs are falling. For example, makers of patio furniture and outdoor grills benefit from lower steel prices. The cost of shipping containers has also fallen and it is easier to find crates.
“At least we see things going — starting to go — in the right direction,” Galanti said.
In the meantime, Costco plans to leverage its size to stay competitive on pricing and grow sales. Membership fees will remain the same for now, but could rise in the future if needed, Galanti said. Competitor Sam’s Club has recently increased its membership fees.
“We still have that arrow in our quiver as we go along,” Galanti said. Shares fell 3% in premarket trading.
The US Purchasing Managers’ Index for September, which charts the health of the manufacturing and services sectors, reports at 9:45 a.m. ET.
Next week: the third quarter is over. The S&P 500 has lost 0.7% since early July. That indicates continued uncertainty, but would represent an improvement from the 16% loss recorded in the second quarter.