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Q4 commodity trends: What’s next for gold?

The fourth quarter poses possible challenges to gold’s price growth, which, unlike many other commodities, has actually seen a strong 17 per cent price rise over the last year.

While other commodity classes struggle amid slowing global growth and reduced demand, gold shines brightly as a safe-haven beacon in a stormy investment environment. The big question now is whether the storms will continue into the next quarter, thereby increasing gold’s attractiveness, or whether they will abate, thus reversing gold’s relatively-bullish trend.

The storms came thick and fast in the first three quarters, driven by the gale-force headwinds generated by the Brexit vote in June, as well as inconsistent US jobs results and unmitigated uncertainty over the Federal Reserve’s rate outlook. All of these put even more of a shine on gold investments, for example, as a hedge against other trades in the currency markets.

Looking at the trend in more detail, it is apparent in September that much depends on Janet Yellen and August’s US labour market performance. During the Jackson Hole summit, the Fed appeared to be moving towards a more hawkish position. Even the market’s most sceptical traders had to acknowledge that if August NFP numbers are strong, it would reinforce the case for a rate hike in the US before the end of the year.

In this scenario, gold seems to be poised to follow a downward trend in September, deepening its current loss of 2.1 per cent for the month of August. The July jobs report showed considerable strength in the US labour market with 255,000 jobs added, but then again, the inconsistency shown so far this year may return to delay the elusive rate hike and add to gold’s allure.

There’s a wide margin for error in the NFP performance this year. In May, for example, the markets were stunned by the figure of 38,000 jobs added versus the 162,000 expected. Unpredictable by this point, the NFP results need to show at least one quarter of consistently strong performances before once more becoming a bedrock of investment decisions and drawing investment away from gold. Bottom line, August’s NFP results will be a major event for gold, as it would increase or decrease the odds of a rate hike.

Moving onto a longer-term outlook, the best market factor favouring gold appears to be the bond market’s woes. The Brexit shock turned yields negative across the board and, two months later, the aftershocks are still rippling. While central bank easing is supporting sovereign bonds – after a sharp lesson learned from the EU sovereign debt crisis – other bond instruments are not so protected, meaning that gold is still offering more to risk-averse investors.

The UK’s decision to leave the European Union leaves many questions and issues hanging in the air, questions that will continue to intensify political and macro-economic uncertainty. These are topped by the question of how the UK’s economy will weather the next period until Article 50 is triggered.

The continuing uncertainty and threat it poses to the bond markets would suggest that central banks will stay loose on monetary policy for at least the next quarter, if not longer.

After the turmoil on the markets seen in the last nine years, investors appear to be remaining cool towards central bank policies, preferring the quick in-and-out during profit-taking opportunities, while hedging their bets with gold derivatives like Exchange Traded Funds (ETFs).

Gold ETFs were a popular investment this year, with some funds like the GLD (SPDR Gold Shares ETF) showing gains of up to 24.5 per cent to date.

The central banks may still have some monetary easing tactics left up their sleeves, but the question remains: how much further can they go? The ECB has already reached the stage of negative interest rates and has a long road ahead before quantitative easing really boosts the economic bottom line. The Bank of England cut its key rate from 0.5 per cent to 0.25 per cent, so the only real options left are leading to zero or negative rates, which may impact direct foreign investment.

All told, the combination of central bank easing, the uncertainty over the Brexit, patchy performances from the US economy and concerns over Federal Reserve’s interest rate outlook are adding up to a favourable tailwind for gold in the fourth quarter. On the upside, the precious metal could move towards $1,400 by year-end and, on the downside, it could see short-term losses on positive US data.

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