The curious case of falling gold prices

By Julia Horowitz, CNN Business

It should be the perfect time to own gold. The yellow metal has historically rallied when inflation is high, since it’s a physical investment that can serve as a store of value. It’s also usually a firm favorite during periods of geopolitical uncertainty, when it’s seen as a safe haven.

But gold prices haven’t surged. In fact, they’re down almost 20% from their recent March peak. That 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.

Breaking it down: Gold prices skyrocketed in early March as fears about the consequences of Russia’s invasion of Ukraine mounted. Since then, however, other market dynamics have come to the fore.

Call it the Fed effect. The central bank has been aggressively hiking interest rates in a bid to bring down inflation, which remains stubbornly high, especially as the war in Ukraine bolsters food and energy prices.

The Federal Reserve increased rates on Wednesday by three-quarters of a percentage point for its third consecutive meeting, an unprecedented move. It also signaled that significant hikes could be on the table in November and December.

That 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.

Those movements have been hurting stocks. But they’re also affecting gold.

That’s in part because transactions of commodities, including gold and other precious metals, usually happen in dollars. A stronger currency makes it more expensive for foreign investors to buy in, and can reduce demand, pushing down prices.

Another factor is the effect of the Fed’s tough hiking cycle on US government bonds. Yields on these bonds, which move opposite prices, have jumped as the Fed has tightened policy. The yield on the benchmark 10-year US Treasury was last at 3.77%, up from about 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 far less attractive.

Patterson put it this way: “If you’re raising interest rates, what would you rather hold, gold or something that’s going to provide you with yield?”

Sign of the times: This week made clear that central banks do not plan to change their tack any time soon, presenting the task of getting inflation under control as their priority.

After the Fed announced its latest rate increase, others followed. The Bank of England pushed rates in the United Kingdom to their highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland all hiked, too.

That means gold is unlikely to launch a comeback in the near term. For that to happen, the picture on inflation would need to shift, Patterson said.

“It’s really hit home this week,” he said. “You’re seeing monetary tightening across the board from most central banks out there.”

Investors hate the United Kingdom’s tax cut gamble

The British pound plunged on Friday after the UK government unveiled its bid to rescue the economy from recession with a plan that involves slashing taxes, removing a cap on banker bonuses and a big increase in borrowing.

This just in: Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth.”

He said the government would cut personal income taxes and cancel plans to raise business taxes next spring. At the same time, Kwarteng said the government would press ahead with plans to subsidize the energy bills for millions of households and businesses.

But the United Kingdom will need to issue significantly more debt to finance this plan, worrying investors. The country plans to borrow $82 billion more than it forecast back in the spring, the UK Treasury said.

The measures come just a day after the Bank of England warned that the country was already likely in a recession as it jacked up interest rates for a seventh time since December last year, part of a bid to tame inflation that is causing a deep cost-of-living crisis for millions of people.

Investors were already concerned that the country is 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 sank almost 2% to $1.10 on Friday after Kwarteng’s announcement, hitting its lowest level since 1985.

British government bonds also sold off sharply. The yield on the benchmark 10-year bond is near 3.78%. It started the year below 1%.

People like to buy stuff in bulk right now

When people are watching their wallets, they’re more inclined to hunt for deals. That means they’re heading to Costco, where they can buy items in bulk on the cheap.

The company said Thursday that revenue for its most recent quarter, which ended in August, rose more than 15% to $72 billion.

What’s Costco seeing? Richard Galanti, the company’s chief financial officer, said there is “a little light at the end of the tunnel” on price increases.

In talking to the company’s vast network of suppliers, there are signs that costs are dropping. Makers of outdoor patio furniture and grills, for example, are benefitting from lower steel prices. The cost of shipping containers has also dropped, and it’s easier to find crates.

“At least we’re seeing the things going — starting to go — in the right direction,” Galanti said.

In the meantime, Costco plans to leverage its size to stay competitive on prices and keep growing sales. Membership costs will stay the same for now, but could go up in the future if needed, Galanti said. Competitor Sam’s Club recently hiked its membership fees.

“We still have that arrow in our quiver as we go forward,” Galanti said. Shares are down 3% in premarket trading.

Up next

The US Purchasing Managers’ Index for September, which provides a look at the health of the manufacturing and services sectors, posts at 9:45 a.m. ET.

Coming next week: The third quarter wraps up. The S&P 500 has lost 0.7% since the beginning of July. That signals ongoing uncertainty, but would mark an improvement over the 16% loss logged during the second quarter.

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