As the US Federal Reserve prepares for a transition on multiple levels – withdrawing addictive quantitative stimulus while engaging in wide-ranging personal shifts at the top – trends are starting to break out. While industrial metals were higher in October, precious metals were lower — and they may have further to go, particularly with regard to gold bar prices.
Gold bar prices interest rate correlation is breaking down, says Capital Economics
As markets began to price in a consistent re-pricing of interest rates amid the expectation for another Fed rate hike in what will be Chair Janet Yellen’s swan song – being replaced by Jerome “Jay” Powell shortly, assuming he is confirmed without much debate as expected – Fed Funds futures have been edging up since September along with the US dollar.
As interest rates have been climbing, the correlation between the Fed funds rate and gold bar prices has gone cold. Starting in early September, gold bar prices began to move markedly lower. After peaking near 1,360, it traded down to 1,270 support in little over a month. On Friday it traded near 1,283 in late afternoon trading.
From Capital Economics standpoint, the correlation divergence has a specific meaning. “Based on the previous relationship between the price of gold and expectations for US interest rates, the yellow metal is set for a big fall,” a November 1 report titled “Commodities on a tear” predicted.
Palladium is expected to drop and revert back to its correlation mean with platinum
Precious metals, with the exception of palladium, were broadly lower in October as the US dollar strengthened. Demand from key buyers in China and India remained muted amid easing geopolitical concerns last month.
Intra market spreads are widening on several levels.
Within the precious metals, the spread between palladium and platinum has risen to $60 per ounce – a spread Capital Economics expects to close. They say palladium’s rally doesn’t appear justified based on fundamental underlying usage statistics.
Another area of correlation divergence is occurring with industrial metals, most of which were higher on the month.
Nickel was the “star performer” on the month, up 18% primarily on increased activity in China’s nickel-based stainless steel production and supply fears coming out of the Philippines. But the rise in price was somewhat odd given the high exchange stocks of nickel that would buffet any minor ripple in production coming out of the Philippines. Aluminum was also higher on the month as a supply downturn emanating from lower Chinese production supported the metal. Exhibiting the strong trending markets, the SG Trend Indicator was up 5.55% on the month.