A month ago, this article laid out the case to expect weakness in gold (NYSE: GLD) prices. Since then, gold is around $50 lower. Weakness is more pronounced in higher-beta precious metals like silver or platinum. The major reason behind this selling are increases in interest rates and the steepening of the yield curve.
This time, precious metals are diverging from the rest of the commodity index which has been particularly strong over the past two months. There's been a reversal of trends from earlier this year, when commodities linked to economic growth flailed, while precious metals soared higher.
The 10Y yield bottomed at 1.45% in early September and has steadily trended higher to 1.72% as of last Thursday's close. Interest rates have climbed on positive developments in trade negotiations and leading economic indicators. This is increasing the probability of the business cycle turning just pent-up demand is unleashed as the trade war ends.
Drivers of Gold Prices
Demand for gold is driven by investors' perceptions about political risk, interest rates, and inflation. Of course, these factors are inter-related as well. Economic environments defined by strong growth and low inflation are the worst for gold, while it can see huge gains when the economy is slowing and in deflation.
Going forward, outcomes for gold seem binary. Either the economy will accelerate to affirm the optimism that asset markets are displaying, or it won't and stocks will fall and gold will climb past its September highs. Another binary is trade. A failure to make a deal would spike political risk, leading to the possibility of even more tariffs and spiking demand for safe-haven assets.
Interesting to note that while stocks are trading as if a trade deal is certain, and accelerating growth is imminent, gold is much less enthusiastic about this outcome. Otherwise, gold prices would be significantly lower. In fact, gold still hasn't given up its breakout fully from September.
Conclusion
For anyone who wants to bet against a trade deal and the economy bottoming in the fourth quarter, gold is a compelling candidate. It's been rather resilient given bearish developments over the past month. The risk/reward is no longer as favorable on the short side as it was in October.