The gold price has already risen to a new all-time high in the Asian session. According to media reports, the triggers were increased demand for safe havens and continued speculation about lower US interest rates. As investors assess the possibility of an impending shutdown of the US federal government, gold (spot) is once again serving as a hedging instrument against political uncertainty and monetary policy changes.
In early European trading, an ounce of the yellow metal already costs more than $3,800 per ounce – another record!
At the same time, the quotations benefited from a weaker US dollar. Previous US inflation data, which turned out to be “in line with expectations”, kept alive hopes that the US Federal Reserve is considering further interest rate cuts – an environment that tends to support gold, as the opportunity costs of a non-interest-bearing investment decrease.
The price rally underscores the dual function of the precious metal: on the one hand, as a store of value in uncertain phases, and on the other hand, as a macro hedge against falling real interest rates. Market participants refer in this context to the increasing caution ahead of important US economic data and to the political headlines from Washington, which are reinforcing risk aversion.
Not Only Gold – Precious Metals as a Whole with Tailwind
Not only gold, but other precious metals also rose significantly. Silver jumped to over $47 per ounce at times – the highest level in over 14 years. Platinum gained around 3% and reached a multi-year high (over 12 years) of $1,619.78 per ounce. These gains are typical of phases in which a weaker greenback makes commodities traded in US dollars cheaper and channels capital into the entire precious metals sector.
While silver often fluctuates more than gold and, in addition to its monetary component, also has a pronounced industrial demand, platinum follows its own supply and demand cycles, but is also pulled upwards in market phases of increased risk aversion. For investors, this means: The current movement is cross-sectoral – with gold as the pacemaker.
US Budget Dispute as an Immediate Price Driver
A significant short-term impulse comes from US politics. According to reports, the financing of the US federal authorities will expire at midnight on September 30. Since neither a new expenditure law nor an extension had been passed by the editorial deadline, the probability of a so-called government shutdown increased. According to reports, cross-party talks are continuing: Republicans are pushing for a transitional law until November, while Democrats are demanding the withdrawal of recent cuts in the health and Medicaid sectors before giving their approval. Leading representatives of both parties are scheduled to meet with President Donald Trump on Monday for mediation talks.
A shutdown would have market-relevant effects in addition to administrative consequences: For example, the publication of the important US labor market data (non-farm payrolls) could be postponed this week. If the standstill lasts longer, impairments of economic activities would also be possible. For classification: The longest partial shutdown to date lasted 35 days from the end of 2018 to the beginning of 2019; the Congressional Budget Office estimated the GDP loss at around 11 billion US dollars at that time. Such reference values increase the sensitivity of the markets – and consequently support gold.
Numerous Factors Support Gold
Several factors are currently coinciding for the gold market: geopolitical and fiscal uncertainties, a weaker US dollar and the expectation that the Federal Reserve is not ruling out a loose course. In summary, this favors an environment in which hedging needs meet ample liquidity. In the short term, the flow of news from Washington – in particular on budget financing – should set the direction. Delays in important economic publications could additionally increase volatility, as there are no benchmarks for monetary policy.
In the medium term, it remains crucial how inflation, real interest rates and the actual monetary policy reaction develop. Should the prospect of further falling key interest rates remain, this will tend to reduce the holding costs of gold and can support the demand for physical metal as well as for futures contracts. On the other hand, a rapid reduction in political uncertainty or a renewed increase in real returns often leads to counter-movements. The dynamics of silver and platinum should also be kept in mind: Both metals react not only to macro impulses, but also to industry-specific factors in the industrial and automotive sectors.
Conclusion: The sudden jump to record levels shows the current vulnerability of the markets to political and monetary policy news. Gold is at the center of the action – as a barometer for risk aversion and as a mirror of interest rate fantasies. Whether the highs will last will depend largely on whether the US budget dispute is resolved quickly and what signals the central bank sends in the coming weeks. Until then, gold – together with silver and platinum – will remain the focus of commodity trading.
