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It should be the perfect time to own gold. The yellow metal has historically grown when inflation is high, as it is a physical investment that can serve as a store of value. It is also usually a favorite in times of geopolitical uncertainty, when it is seen as a safe haven.
But gold prices haven’t gone up. In fact, they are down nearly 20% from their recent peak in March. This puts gold on the brink of a bear market.
“Investors don’t have much appetite for holding gold in today’s environment,” Warren Patterson, head of commodities strategy at ING told me.
Breakdown: Gold prices skyrocketed in early March as fears over the aftermath of the Russian invasion of Ukraine increased. Since then, however, other market dynamics have emerged.
Call it the Fed effect. The central bank has aggressively raised interest rates in an attempt to lower inflation, which remains stubbornly high, especially as the war in Ukraine has boosted food and energy prices.
The Federal Reserve raised rates Wednesday by three-quarters of a percentage point for its third consecutive meeting, an unprecedented move. He also signaled that significant increases could be expected in November and December.
That action pushed the US dollar to a new two-decade high. The greenback was up 16% against a basket of major currencies this year, a huge increase.
Those moves hurt the stocks. But they are also influencing gold.
This is partly due to the fact that transactions in commodities, including gold and other precious metals, usually take place in dollars. A stronger currency makes it more expensive for foreign investors to buy and can reduce demand, driving prices down.
Another factor is the effect of the Fed’s tough bullish cycle on US government bonds. Yields on these bonds, which move opposite prices, have risen as the Fed tightened policy. The benchmark 10-year US Treasury yield was the latest 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’re raising interest rates, what would you rather hold, gold or something that will give you a return?”
Sign of the times: This week he made it clear that central banks do not intend to change course anytime soon, presenting the task of keeping inflation under control as their priority.
After the Fed announced its latest rate hike, more followed. The Bank of England pushed UK rates to their highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland also rose.
This means that gold is unlikely to start a comeback in the near term. For that to happen, the inflation picture would have to change, Patterson said.
“This week has really hit the mark,” he said. “You are seeing monetary tightening across the board from most of the central banks out there.”
The British pound plunged on Friday after the British government presented its offer to save the economy from recession with a plan that includes tax cuts, the removal of a cap on bank bonuses and a sharp increase in loans.
This only in: Finance Minister Kwasi Kwarteng said the government needed “a new approach for a new era, focused on growth”.
He said the government will cut personal income taxes and cancel plans to raise corporate taxes next spring. At the same time, Kwarteng said the government will go ahead with plans to subsidize energy bills for millions of households and businesses.
But the UK will have to issue much more debt to finance this plan, worrying investors. The country plans to borrow $ 82 billion more than expected in the spring, the UK Treasury said.
The measures come just a day after the Bank of England warned that the country was likely already in recession as it raised interest rates for the seventh time since December last year, part of an attempt to tame inflation. it is causing a profound cost. to experience the crisis for millions of people.
Investors were already worried that the country was spending beyond its means. The Institute for Fiscal Studies warned in a report on Wednesday that government debt was on an “unsustainable path”.
Investor Information: The pound fell nearly 2% to $ 1.10 on Friday after Kwarteng’s announcement, reaching its lowest level since 1985.
British government bonds were also sold sharply. The yield on the benchmark 10-year bond is close to 3.78%. He started the year under 1%.
When people check their wallets, they are more inclined to look for offers. This means they are heading to Costco (COST), where they can buy cheap wholesale items.
The company said Thursday that revenue for its most recent quarter, which ended in August, was up more than 15% to $ 72 billion.
What is Costco seeing? Richard Galanti, the company’s chief financial officer, said there is “some light at the end of the tunnel” on price increases.
Speaking to the company’s vast network of suppliers, there are signs of falling costs. Manufacturers of garden furniture and outdoor grills, for example, are benefiting from lower steel prices. The cost of containers has also decreased and crates are easier to find.
“At least we’re seeing things are going – starting to go – in the right direction,” said Galanti.
Meanwhile, Costco plans to leverage its size to remain price competitive and continue to grow sales. Tuition costs will remain the same for now, but could increase in the future if needed, Galanti said. Competitor Sam’s Club recently increased membership dues.
“We still have that arrow in our quiver as we move forward,” Galanti said. Stocks are down 3% in pre-market trading.
The US Purchasing Managers Index for September, which provides a look at the health of the manufacturing and services sectors, is released at 9:45 am ET.
Coming next week: the third quarter ends. The S&P 500 has lost 0.7% since the beginning of July. This signals continued uncertainty, but would mark an improvement from the 16% loss recorded during the second quarter.