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Gold Suffers Worst Crash in 3 Years Because Investors Ignored One Crucial Fact

Last Updated September 23, 2020 1:16 PM
Sam Bourgi
Last Updated September 23, 2020 1:16 PM
  • Gold price suffers worst weekly drop in three years as investors tilt toward risk-on assets.
  • December gold futures are hovering around $1,465/oz, the lowest in over three months.
  • Despite the fall, the Federal Reserve’s ‘war on savings’ will keep gold prices trekking higher over the long haul.

The price of gold is plunging this week by the most in three years – a knee-jerk reaction to the U.S. stock market’s record-breaking surge.

Bullion’s steep selloff comes after major banks  and precious-metal manipulators  Citigroup and JPMorgan cut ties to the traditionally haven asset on the belief that a U.S.-China trade deal will push equities even higher.

Gold Price: Worst Weekly Performance in Three Years

Gold for December delivery, the most actively traded futures contract, plunged by as much as 3.7% this week. The worst weekly slide since the aftermath of the 2016 presidential election came as the United States and China headed toward an interim trade deal – or so investors thought.

The yellow metal was last seen hovering around $1,465.00 a troy ounce on the Comex division of the New York Mercantile Exchange. At the start of the week, it was testing the $1,520.00 range.

December gold futures
Gold’s steep correction drags prices to three-month lows. | Chart: barchart.com 

Silver prices plunged in lockstep with gold, as the grey metal bottomed at $16.66 a troy ounce Friday. Peak-to-trough, silver declined a whopping 7.7% this week. The December contract is currently valued at $16.93, according to Bloomberg data .

Interest Rates are Rising

U.S. Treasury yields spiked this week by the most in three years on the belief that the Federal Reserve is done cutting interest rates. Fed Fund futures prices, which are used by portfolio managers to bet on the trajectory of monetary policy, imply no more rate cuts through at least September 2020.

CME Fed Fund futures
Futures traders believe the Fed will hold off on cutting interest rates again. The current chart shows a majority believe there will be no cuts by September 2020. | Chart: CME Group 

Euro Pacific Capital CEO Peter Schiff explains why this belief is short-sighted and why the Fed will ultimately lower interest rates again:

Peter Schiff tweet
Peter Schiff believes traders are miscalculating the Fed. | Image: Twitter 

Schiff says the U.S. central bank has already begun “unofficial QE4,” a reference to post-crisis quantitative easing that swelled the Fed’s balance sheet past $3.5 trillion. That’s because officials have been pumping the overnight repo market with hundreds of billions of dollars to shore up a liquidity crisis. Since the repo operations began in mid-September, the Fed has printed more money at twice the rate of QE3, or the final leg of quantitative easing.

Peter Schiff tweet
The Fed embarks on another form of QE under a different name. | Image: Twitter 

Fed’s ‘War on Savings’ to Propel Gold Higher Long-Term

Despite pressuring gold in the short-term, long-term interest rates are unlikely to rise for much longer.

For starters, the U.S. Treasury yield curve is behaving exactly as it would just before recession hits. That’s because the sudden steepening of the yield curve follows a frightful inversion this summer that predicts recession almost 100% of the time. Just because long-term interest rates are rising now, it doesn’t mean investors have disregarded recession risks.

Interest rates may be rising in a nominal sense, but so long as inflation is rising faster, gold will remain in a primary bull market. That’s the real reason gold broke out to six-year highs and why it will likely continue higher in the long term.

As Schiff notes, some interest rates aren’t even rising in a nominal sense. Short-term rates are negative:

Peter Schiff tweet
The real reason gold is in a bull market is because inflation is rising faster than interest rates. | Image: Twitter 

The “war on savings” being waged by the Fed and other central banks make non-yielding assets such as gold more attractive long-term.

Peter Schiff tweet
Schiff says the “war on savings” waged by central banks will keep gold prices trekking higher. | Image: Twitter 

So, while gold may be falling in the short term, all the ingredients are there for a continued rally once the trade-deal euphoria evaporates.

That could happen sooner than most people think.

As The Wall Street Journal reported  Friday, President Trump says the United States hasn’t agreed to roll back tariffs as part of an interim trade deal. Stocks zipped to record highs on Thursday precisely on the belief that the Trump administration would cut tariffs to move the trade talks along.