Pre-Sale Inventory: The Strange Case of Low Gold Prices
But gold prices did not rise. In fact, it’s down nearly 20% from its recent peak in March. This puts gold on the cusp of a bear market.
“Investors don’t have a strong appetite for holding gold in the current environment,” Warren Patterson, head of commodity strategy at ING told me.
Its analysis: Gold prices rose significantly in early March as concerns escalated about the consequences of the Russian invasion of Ukraine. But since then, other market dynamics have come to the fore.
Call it the Federal Reserve effect. The central bank has been aggressively raising interest rates in an effort to bring down inflation, which remains stubbornly high, especially as the war in Ukraine has boosted food and energy prices.
This action pushed the US dollar to a new high in two decades. The dollar is up 16% against a basket of major currencies this year so far, which is a significant gain.
Those moves were hurting stocks. But it also affects gold.
This is partly because transactions for commodities, including gold and other precious metals, usually occur in dollars. A stronger currency makes it more expensive for foreign investors to buy, and can reduce demand, leading to lower prices.
Another factor is the impact of the Fed’s challenging bull cycle on US government bonds. The yields of these bonds, which are moving at opposite rates, jumped as the Federal Reserve tightened its policy. The yield on the benchmark 10-year US Treasury was at 3.77% last time, up from about 1.5% at the start of the year.
Gold also competes with government bonds as a safe investment. And when investors can get better returns on the latter, the former looks much less attractive.
Patterson put it this way: “If you were raising interest rates, what would you rather have, gold or something that would give you a return?”
Mark of the times: This week I made it clear that central banks do not plan to change course anytime soon, making the task of controlling inflation a priority.
This means that it is unlikely that gold will start to return in the near term. For that to happen, the picture about inflation needs to change, Patterson said.
“It really hit the house this week,” he said. “You’re seeing monetary tightening across the board from most central banks out there.”
Investors hate to gamble with UK tax cuts
It’s just in: Finance Minister Kwasi Kwarting said the government needed a “new approach for a new era, focused on growth.”
He said the government will cut personal income taxes and cancel plans to raise business taxes next spring. Meanwhile, Kwarteng said the government will go ahead with its plans to subsidize the energy bills of millions of homes and businesses.
But the UK will need to issue significantly more debt to fund this plan, which has investors worried. Britain’s Treasury said the country plans to borrow $82 billion more than it forecast in the spring.
The measures come just a day after the Bank of England warned that the country was already in a recession as it raised interest rates for the seventh time since December last year, as part of an attempt to tame inflation that has caused an exorbitant cost-of-living crisis for millions of people.
Investors were already concerned that the state was spending beyond its means. The Institute for Fiscal Studies warned in a report on Wednesday that government borrowing is on an “unsustainable path”.
Investors’ view: Sterling fell nearly 2% to $1.10 on Friday after Kwarteng’s announcement, hitting its lowest level since 1985.
British government bonds also sold sharply. The yield on the standard 10-year bond is close to 3.78%. The year started less than 1%.
People like to buy things in bulk nowadays
The company said Thursday that its revenue for the fourth quarter, which ended in August, rose more than 15% to $72 billion.
What do you see Costco? Richard Galanti, the company’s chief financial officer, said there was “a little bit of light at the end of the tunnel” on the price hike.
Speaking to the company’s extensive supplier network, there are signs of lower costs. For example, makers of outdoor patio furniture and grills are benefiting from lower steel prices. The cost of shipping containers has also decreased, and the boxes are easier to find.
“At least we’re seeing things go — start to go — in the right direction,” Galanti said.
Meanwhile, Costco plans to capitalize on its size to remain competitive on pricing and continue to grow sales. Galante said membership costs will remain the same for now, but may rise in the future if necessary. Rival Sam’s Club recently raised membership fees.
“We still have that stock up our sleeve as we move forward,” Galanti said. Shares are down 3% in pre-market trading.
The US Purchasing Managers’ Index for September, which provides a look at the health of the manufacturing and services sectors, is published at 9:45 AM ET.
Next week comes: the third quarter ends. The S&P 500 has lost 0.7% since the beginning of July. That indicates continued uncertainty, but it marks an improvement over the 16% loss that was recorded during the second quarter.