Despite Headwinds, Gold’s Base Remains Solid

Gold Price Held Firm in October As U.S. Dollar Gained Strength

The gold price held its ground during October with a small loss of $9.08 (-0.7%), ending the month at $1,271.07 per ounce. Most of the macroeconomic news was gold negative although U.S. economic releases in the month were favorable and third quarter GDP growth beat expectations. The market gained conviction for a December Federal Reserve (Fed) rate increase and there was activity in the Senate that might enable tax reform later this year. Also, the European Central Bank (ECB) announced much anticipated plans to taper its bond purchases that was not as aggressive as expected. All of this caused both the U.S. dollar and interest rates to trend higher, keeping a lid on the gold price.

Gold stocks traded a bit lower with the gold price. The NYSE Arca Gold Miners Index (GDMNTR)1 fell 2.1% while the MVIS Global Junior Gold Miners Index (MVGDXJTR)2 declined 4.8%. Many of the large companies reported third-quarter results that matched expectations.

Looming Headwinds to Gold May Also Add Global Economic Risks

Gold may face several headwinds in the remainder of the fourth quarter that could lend strength to the U.S. dollar:

  • The economic strength reported in October (for September), along with two consecutive quarters of 3% GDP growth, may indicate the economy is gaining momentum. If this continues, gold will likely remain under pressure. However, since the financial crisis, economic growth has been inconsistent and below historic norms. This, along with our belief that this is a late-cycle economy, suggests we are due for some disappointments in the economy.
  • Gold may be negatively impacted if expected tax reforms accomplish their stated goals, namely lower taxes for the general public, elimination of provisions for special interests, and overall simplification of the tax system. Given past performance from Washington, infighting among Republicans could result in limited reforms. Also, tax reform is likely to…

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