TWO TIMEFRAMES IN ONE PRICE

Precious metals started the new week with another unusual market story. Normally, rising tensions in the Middle East, concerns about oil supply, and a move away from risk in global markets could support precious metals, especially gold. But once again, this did not happen. Markets continue to surprise us, and new stories are being added to the global picture. Saudi Arabia’s closure of the East-West oil pipeline and continued uncertainty around the Strait of Hormuz pushed Brent oil to around $108. Higher energy prices have once again increased concerns about global inflation. As oil prices rise, the market is focusing less on geopolitical risk itself and more on what higher oil prices could mean for inflation and Fed policy. Ahead of the Fed meeting tomorrow, a rate hike has become the main market expectation.

And everyone is asking the same question:  Will this be a one-time move, or the beginning of a new rate-hike cycle?

But there is another interesting story in the gold market. Short-term investors are moving away from gold because of high interest rates and rising bond yields, while central banks continue to buy. So, in fact, two different gold stories are happening at the same time. On one side, investors are pricing the next few weeks or months. On the other side, central banks are managing their reserves with the next several years in mind. Short-term investors are saying, “Interest rates are high, so gold is under pressure.” Central banks, however, are using lower prices as an opportunity to increase their gold reserves. Maybe the real difference in the gold market is not the price itself, but the time horizon of the buyer. Traders are looking a few months ahead. Central banks are looking several years ahead.

So who will be right this time: the market pricing the next few months, or the central banks preparing for the next few years?