Gold finished the month of November up a little over 8.0%

Gold didn’t stray far from three-month highs around $1,750 during the US Thanksgiving holiday-shortened week and went on to finish November up a little over 8.0% on the month. The yellow metal then kicked off December strongly, trading above $1,800 for the first time since August, thanks to Federal Reserve Chairman Powell this Wednesday signaling that although rate hikes are likely to continue for a while yet, the time has come – perhaps at the Dec. 13-14 FOMC meeting – to consider smaller moves than the 75bp hikes delivered at the last four policy meetings. Over the week to Thursday’s close gold gained 2.7%, further trimming its retreat this year to just 1.5% (spot ref.: $1,803).

Although other Fed officials recently have also indicated an inclination to reduce the pace of rate hikes, Chair Powell’s signal elicited strong reactions across financial markets for two main reasons. First because he was widely expected to push back against smaller rate hikes in his speech at the Brookings Institution on Wednesday, i.e., be hawkish, akin to how he was in his speech at the Jackson Hole Symposium in August. Markets were caught offside and reacted strongly when he seemed dovish instead. The second main reason gold and other assets rallied is because with the Fed Chairman now apparently on board with smaller rate hikes, those seem likely to occur.

Of course, at the core of gold’s gains over the past month has been weakness in the US dollar and lower US Treasury yields, those beginning with softer-than-expected October CPI reported in early November and reflecting the prospect of a less aggressive Fed.  

After sliding about 4.5% in November, the US Dollar Index (DXY) lost another 1.3% in the week to Thursday’s close. Since peaking in late September, DXY is down almost 8.0%, more than twice the drop (-3.6%) in the Fed’s Nominal Broad US Dollar Index over the same time frame. One explanation for the outsized loss in DXY could be it being tradeable (the Fed’s index is not) and so a bailout of long positioning initiated on views for continued Fed aggression. The Fed’s index is also trade-weighted and has many more moving parts than DXY does (just six). At any rate, for as long as market sentiment stays tilted bearishly against the greenback, gold could stand to benefit. 

Since peaking in early November, nominal US Treasury yields have fallen quite a bit, by roughly 29bp in the 2y, 59bp in the 5y and 54bp in the 10y. In the five business days to Thursday’s close, those yields’ respective drops were 17bp (to 4.25%), 17bp (to 3.68%), and 15bp (to 3.53%) Interesting considering their typical outsized influence on gold and the yellow metal’s strength over the past month, real Treasury yields (TIPS) have come off less since early November, the 5y by about 39bp and 10y also by 39bp. In the five business days to Thursday’s close those yields’ respective drops were 28bp (to 1.23%) and 19bp (to 1.17%). With the falls in nominal yields over the past month outpacing those in real yields, breakeven inflation rates (BEI) compressed, the 5y by about 20bp and 10y by 15bp. Falling BEIs, which imply lower market-priced inflation expectations, usually undermine gold, so the yellow metal’s coincident strength is certainly notable. The recent protests in China may have been supportive of gold as well insofar as they added to other uncertainties in the world’s second-largest economy. While China’s much-anticipated reopening has been start-stop so far, there have been several moves by the authorities, including easing lockdowns, that suggest a desire to reopen in a more sustained way. A full reopening might benefit gold by unleashing demand for it in a country where it has been prized historically. China equities have staged a strong recovery over the past month. The Shanghai Composite is up 9.0% since Nov. 1 and Hong Kong’s Hang Seng (many China-based companies listed) has surged 27.0%. The offshore yuan has strengthened 3.8% against the US dollar over the same time frame.

Oil prices had another topsy-turvy week, at one point falling to basically unchanged on the year before staging a recovery. Brent was -0.7% and WTI +0.5% in the week to Thursday’s close. The main directional catalysts were familiar: weakness driven by concerns over economic growth (especially in China, the world’s largest importer of crude oil), and strength on speculation that lower prices might result in OPEC+ deciding to curtail production at its meeting this Sunday (Dec. 4). What happens when the EU’s new sanctions/price cap on Russian oil go into effect remains a wild card for the market.

Middle East stock markets were mixed over the week to Thursday’s close. Perhaps buoyed by positive sentiment around the country hosting the World Cup, Qatar’s stock index led the way with a gain of 1.3%. Qatar’s riyal, which is pegged to the US dollar at an average price of 3.64, was indicated about 0.2% firmer vs. the greenback on the interbank market. Saudi Arabia’s Tadawul All Share was down 1.3%. Abu Dhabi’s FTSE ADX General (+0.22%) and Dubai’s DFM General -0.07%) were little changed, with participation perhaps lessened by festivities ahead of the UAE’s National Day (Dec. 2).

The Eurozone got good news on the inflation front Wednesday as the flash estimate for headline CPI in November came in at 10.0% y/y, down from 10.6% y/y in October. On a monthly basis, headline CPI was -0.1%, down quite a bit from 1.5% m/m in October. Much like Fed officials, however, European Central Bank officials, and in particular President Lagarde, have been clear that rate hikes will continue into 2023. If anything, some analysts think the inflation data could have the ECB opt for 50bp hikes in its policy rates henceforth, after having hiked 75bp twice since commencing a tightening cycle in September. The euro made good headway against the US dollar in November, with EURUSD rising a hefty 4.6%. Over the past week, the pair gained a further 1.0%.

We spied an interesting article (subscription may be required) on Bloomberg this week. The short of it is that the country of Ghana is in the process of making arrangements to barter gold for fuel. This follows Ghana’s currency (the cedi) losing more than 50% versus the US dollar this year. No matter the advances in technology and the advent of cryptocurrencies, gold never really goes out of style. This example seems strong testament to gold’s historic propositions as a means of exchange and a store of value.