Gold will be more volatile

Gold price has been volatile. But things will get worse recently.

Three drivers make gold price volatile

  • Global Real Interest Rate

    Negative correlation with gold price.

  • Spot Supply and Demand

    The balance of supply and demand decides gold price.

  • Risk Hedge Demand

    Positive correlation with gold price.

Gold price is affected by global real interest rate level (negative), balance of supply and demand in spot market (positive), and risk hedge demand (positive).

In the past half month, the US economic data updated continually. The market struggled against the Fed’s interest rate hike view. It has successively experienced an unexpected increase in the number of unemployment insurance initial claims (favorable for gold price), a Powell hawk speech (suppress gold price), and the number of nonfarm payrolls was still higher than expected to reach 311K (suppress gold price).

Only a few days ago, the possibility of the Federal Reserve raising interest rates by 50 bp in March is still being traded, which is also the reason for the sluggish trend of gold.

Bad news, it will get more volatile

However, most recently, due to the several bank failures in United States, the market began to worry about the bank run risk, which soonly led to panic selling of bank stocks. Investors has already priced the possibility of Fed’s considering financial security and turning dovish in advance.

Unlike in 2008, currently failing banks were mostly caused by liquidity mismatches rather than holding a number of low-rated assets, so banks that hedge interest rate risk previously are still safe. It is expected that the short-term panic will get effectively controlled by the US Treasury and the Federal Reserve, and the price of gold will fall back to the original track after risk aversion.

Under this premise, the Fed may adjust the sharp hawkish plan to a mild one, and the basis for the rate decision will return to inflation. At present, inflation in US labor market is still resilient, so in the short term, gold price will still be volatile and in no trend. In the medium term, as inflation falls, gold price will have opportunities.

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