Gold is up modestly, reaching yet another 3-week high, but still well within the broader range that has been in place since early-October. A pullback in the dollar and a sharp drop in stocks are both helping to underpin the yellow metal today.
Further reports today that the Senate version of tax reform will delay the corporate tax cuts until 2019 — along with Democrat election wins earlier this week — have created some doubts that the tax package will get passed at all. If tax reform fails, GOP Congressional majorities are possibly in jeopardy next year.
If the GOP loses one or both houses of Congress in the 2018 elections, the pro-business Trump administration will be severely hamstrung. In which case, stocks are waaaaaaay overvalued.
Additionally, the debt ceiling is back in play a month from today and with everyone focused on tax legislation, the impending threat of a government shutdown is on the back-burner. Bloomberg warns that we should Get Ready for a Washington Train Wreck in December.
If what we’re seeing today is an early indication that volatility is returning to markets, the investor complacency that has held sway in recent years is likely to come to a screeching halt. In that environment, safe-haven assets like gold are going to be back in favor.
This quote from former Fed VC Fischer leapt to mind today, as it speaks to complacency. If these words of wisdom hold true for the world’s central bankers, they certainly hold true for the individual investor as well.
The World Gold Council’s Gold Demand Trends for Q3 are getting a lot of play in the press today. An FT headline blared that it was a “tough quarter for gold as demand slides to 8-year low.”
However, when you look at the price of gold, you wouldn’t necessarily deduce that demand is down. The price of gold is up 11.7% y-t-d and only down 2.7% versus the third quarter of last year. If you go back 8-years, gold ended Q3-09 at $1007.25. That means the yellow metal is up nearly 28% since the last time demand was this “low”.
In the face of recent dollar gains and the persistent march higher for equities, gold has actually proven to be remarkably resilient. The WGC pointed out that “gold remained an important risk-hedge, but the market lacked a catalyst.” While it may be too early to tell for sure, the catalyst that will drive gold through the upside of its range may in fact be emerging.