Will the fourth quarter of 2021 be better for gold?

October 5, 2021 (Investorideas.com Newswire) The third quarter of 2021 was bad for gold, with a particularly horrific September. Could the rest of the year be better for the yellow metal?

September is historically considered one of the best months for gold. Well, September 2021 certainly wasn’t very good for the yellow metal. As shown in the chart below, the price of gold has fallen by almost 4% during this month (from $ 1,814.85 at the end of August to $ 1,742.80 at the end of September).

In fact, the entire third quarter was rather disappointing for the yellow metal, which has lost 1.15% over the past three months. However, it was still much better than the disastrous first quarter of the year when gold had plunged more than 10%. So far, the yellow metal is down 7.67% year-to-date.

But why did gold perform so poorly last month despite high inflation and all the risks present to the US economy? In short, the rise in bond yields and the strengthening of the greenback were the main headwinds for gold in September and, more generally, throughout the third quarter of 2021, as shown in the chart below.

In the first half of the year, the US dollar performed rather poorly, but a more hawkish Fed helped revive the greenback and push up interest rates. In such an environment, all safe havens – against a background of uncertainty about the debt ceiling, China’s debt problems, etc. – were channeled into the US dollar alone. In other words, due to the Fed’s tapering expectations, the recent sentiment of risk aversion has only benefited the greenback, not gold. Thus, the attractiveness of gold as a safe haven asset has recently waned. The same is true, in fact, of gold’s status as an inflation hedge.

To be clear, the whole question is more nuanced. I believe that gold still has anti-inflationary characteristics, especially when inflation is very high and accelerating. I also believe that gold will retain its purchasing power over the long term. It could simply be that the rise in interest rates outweighed the reasons for investing in gold during inflation, especially since it appears that the Fed has convinced the markets that inflation will only be temporary.

However, if inflation turns out to be more persistent, the Fed could end up behind the curve, while real interest rates could remain at very low levels. In such a scenario, the demand for gold as an inflation hedge could increase again. As a reminder, there are many arguments for high inflation to persist longer. Even Powell admitted last week that inflationary pressure would continue into the next year:

It is also frustrating that the bottlenecks and supply chain issues are not improving – in fact the margins seem to be getting a bit worse (…) We see this continuing probably next year. and keep inflation going longer than we thought.

Implications for gold

What does all this mean for the gold market? Well, the recent surge in gold prices is pretty encouraging. However, this does not change the bearish outlook for gold for the fourth quarter of 2021. Gold has not been able to break above $ 1,800 and it looks like it wants to continue falling. In particular, any further hawkish comment from the Fed could push gold prices further down.

Having said that, I am more optimistic about gold in 2022. One reason is that over time the story of transient inflation will seem less and less convincing. Meanwhile, the chances of an inflationary crisis, or stagflation, are expected to be higher and higher.

Second, the Fed’s tightening cycle already appears to be largely integrated. So, actual moves might start supporting gold at some point, in keeping with the logic of “sell the rumor, buy the fact”, especially if the moves are accompanied by conciliatory rhetoric, as was partially the case. case during the last tightening cycle. from 2015-2019.

If you enjoyed today’s Free Gold Report, we invite you to check out our premium services. We provide much more detailed fundamental analysis of the gold market in our monthly Gold Market Insight reports and we provide daily gold and silver trading alerts with buy and sell signals. clear sale. In order to take full advantage of our gold analyzes, we invite you to register today. If you are not yet ready to subscribe and you are not yet on our Gold mailing list, we invite you to subscribe. It’s free and if you don’t like it you can easily unsubscribe. Register today!

Arkadiusz Sieron, PhD
Sunshine Profits: Efficient Investing Through Diligence and Care

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