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This should be the perfect time to own gold. The yellow metal has historically rebounded when inflation is high because it is a physical investment that can act as a store of value. It is also generally a favorite during times of geopolitical uncertainty, when considered a safe haven.
But gold prices have not increased. In fact, they are down almost 20% from their recent peak in March. This puts gold on the cusp of a bear market.
“Investors don’t have much appetite to hold gold in the current environment,” Warren Patterson, head of commodities strategy at ING, told me.
Breakdown: Gold prices soared in early March as fears over the consequences of Russia’s invasion of Ukraine mounted. Since then, however, other market dynamics have emerged.
Call it the Fed effect. The central bank has aggressively raised interest rates in an effort to bring down inflation, which remains stubbornly high, especially as the war in Ukraine drives up food and energy prices.
The Federal Reserve raised rates on Wednesday by three-quarters of a percentage point for its third consecutive meeting, an unprecedented move. He also signaled that significant hikes could be on the table in November and December.
This action pushed the US dollar to a new two-decade high. The greenback is up 16% against a basket of major currencies so far this year, a huge rise.
These moves hurt stocks. But they also affect gold.
This is partly because trading in commodities, including gold and other precious metals, is usually done 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 hike cycle on US government bonds. Yields on these bonds, which move opposite to prices, jumped as the Fed tightened policy. The yield on the benchmark 10-year US Treasury last stood at 3.77%, down from around 1.5% at the start of the year.
Gold also competes with government bonds as a safe haven. And where investors can get better returns on the latter, the former looks much less attractive.
Patterson put it this way: “If you raise interest rates, what would you rather hold, gold or something that’s going to provide you with a return?”
Sign of the times: This week has made it clear that central banks are not planning to change tack any time soon, presenting the task of controlling inflation as their priority.
After the Fed announced its latest rate hike, others followed. The Bank of England pushed rates in the UK to their highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland also rose.
This means that gold should not make a comeback in the short term. For that to happen, the picture of inflation would have to change, Patterson said.
“It really hit home this week,” he said. “You see widespread monetary tightening from most central banks.”
The pound plunged on Friday after the UK government unveiled its bid to save the economy from recession with a plan that involves cutting taxes, removing a cap on bankers’ bonuses and a big increase in borrowing .
It just happened: Finance Minister Kwasi Kwarteng said the government needed a ‘new approach for a new era, growth-oriented’.
He said the government would cut personal income tax and roll back plans to raise corporate taxes next spring. At the same time, Kwarteng said the government would continue with plans to subsidize the energy bills of millions of households and businesses.
But the United Kingdom will have to issue significantly more debt to finance this plan, which worries investors. The country plans to borrow $82 billion more than expected in the spring, the UK Treasury has announced.
The measures come just a day after the Bank of England warned the country was already likely in recession as it hiked interest rates for the seventh time since December last year, as part of a an attempt to control inflation which entails a significant cost. life 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 Wednesday report that government borrowing was on an “unsustainable path.”
Investor Insight: The pound fell nearly 2% to $1.10 on Friday after Kwarteng’s announcement, hitting its lowest level since 1985.
UK government bonds also sold off strongly. The yield on the 10-year benchmark bond is close to 3.78%. It started the year below 1%.
When people watch their portfolio, they are more likely to search for deals. This means they head to Costco (COST), where they can buy bulk items at low prices.
The company said Thursday that revenue in its most recent quarter, which ended in August, rose more than 15% to $72 billion.
What does Costco see? Richard Galanti, the company’s chief financial officer, said there was “a little light at the end of the tunnel” on the price increases.
Speaking with the company’s extensive supplier network, there are signs of lower costs. Manufacturers of patio furniture and outdoor grills, for example, are benefiting from lower steel prices. The cost of shipping containers has also gone down, and crates are easier to find.
“At least we see things going – starting to go – in the right direction,” Galanti said.
In the meantime, Costco plans to leverage its size to stay competitive on price and continue to grow sales. Membership fees will remain the same for now, but may increase in the future if needed, Galanti said. Competitor Sam’s Club recently increased its membership fees.
“We still have that arrow in our quiver as we go forward,” Galanti said. The shares are down 3% in premarket trading.
The U.S. Purchasing Managers’ Index for September, which provides insight into the health of the manufacturing and services sectors, displays at 9:45 a.m. ET.
Coming next week: Quarter 3 is coming to an end. The S&P 500 has lost 0.7% since early July. This signals continued uncertainty, but would mark an improvement from the 16% loss recorded in the second quarter.