Analysis: US Fed bears down on gold

Gold is testing five-and-a-half-year lows; it’s at the floor of a falling channel. So surely it must be a 'buy'? Maybe, but watch out, writes Accendo analyst Augustin Eden.

Gold is actually as out of favour as it gets. The US Federal Reserve’s game of ‘will I, won’t I’ is continuing in typical fashion with that ever present wiggle room still very much in play.

However, these latest FOMC minutes were slightly different to those that went before and it’s proving even worse for Gold than it ever did for the markets’ nerves.

Read more: Federal Reserve statement leaves September US rate hike on the cards

The content was much the same, the tone still arguably hawkish. The Fed has only two more opportunities to keep its pseudo-promise to hike rates this year.

It was the surprisingly muted reaction of the indices we follow – FTSE100, Dow Jones and DAX – that was interesting.

Are the markets satisfied that a US rate rise is now essentially priced in? Are they now looking to other global drivers for direction?

Sadly for goldbugs, there aren’t many - if any - bullish drivers for gold out there.

Firstly, the already talked about prospect of US interest rates maybe going higher in the near future, but certainly going higher eventually, is bumping up demand for the dollar as bond traders and those investors seeking safe havens pile into the currency in pursuit of US Treasury bills.

Treasuries, of course, pay interest. Gold does not. With markets now apparently happy to take on interest rate rises on both sides of the Atlantic, gold looks set for further losses.

Secondly, the only other driver is arguably China, whose depressed manufacturing industry is not providing the usual buoyancy.

There are many factories in China producing a wide range of goods, including electronics.

Go back to July and Apple’s record-breaking earnings report and nerve-touching second-half outlook of fewer iPhones seen to be coming out of Chinese factories which took $50bn off its market capitalisation.

Both gold and copper – essential basic materials in the manufacture of electronics – have suffered hugely as a consequence and look set to continue to do so. No bottom just yet, then.

People were talking about all of the above in the run up to last week’s Fed meeting. Now that’s come and gone, and bar the odd bit of alternately hawkish and dovish Fed commentary, is there anything that could support the gold price, or has gold’s job description gone completely out of favour with the current global economic environment?

Certainly, we’re unlikely to see any recovery spurred by the search for a safe haven, with US treasuries, the Japanese yen and indeed the US dollar itself absorbing that flow.

But renewed demand in China could prove a saving grace.

You see, China wants its renminbi to be a reserve currency like the US dollar. To do that, the IMF has set some targets for the Chinese government. It should be buying lots of gold. But it’s missing its targets.

A resurgence in Chinese physical demand to back up the renminbi could be what the yellow metal needs to recover, but even this won’t prove permanent in any way.

What is really needed is good old fashioned manufacturing growth in the world’s number-two economy – more iPhones please.

Augustin Eden is a market analyst at Accendo Markets UK.