Hawaii Six O - Gary Wagner
Gold declined by $79.50 this week and $99.80 in September - Who’s to blame
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This is the second largest monthly decline this year with only February having a greater devaluation of gold futures. In February gold prices dropped by $108.60 a decline of 5.37%, September will come in as a close second giving up $99.80 or 5.08%. The largest gain for a single month this year occurred in March with gold gaining almost 7% (6.9% to be exact) gaining $131.90 as it opened at $1909.09 and traded on the last day of the month at the highest value this year $2044.50.
If we create a Fibonacci retracement that begins at a major and important low that occurred beginning at the end of September, through October (forming a triple bottom), and concluding in November 2022 at $1729 (the record high this year), gold futures broke below the 61.8% Fibonacci retracement last week and declined even further today, the last trading day and week of the month.
Current pricing is below all three major simple moving averages the 200-day, the excepted length to determine long-term sentiment, 100-day the excepted length to determine intermediate market sentiment, and the 50-day moving average the excepted length to determine short-term market sentiment.
The root cause of this strong and major price decline in gold can be directly tied to the current monetary policy of the Federal Reserve including a major revision that was announced at last week’s September FOMC meeting. While some might lay blame for the high level of inflation as the root cause of gold’s price decline gold usually performs well in this type of environment. The almost hundred-dollar decline this month had a small component of dollar strength, but the major impetus was a change to the monetary policy of the Federal Reserve.
It is the opinion of this author that the Federal Reserve while not creating the high level of inflation reacted to it months after they should have begun to use their tools and bring inflation down.
The image above is a monthly table of inflation from 2015 to 2023. In January 2021 inflation was running in a tepid 1.4% well below the Fed’s 2% target. The first occurrence of inflation running hot occurred in March 2021 inflation rose to 2.6%. Inflation rose to 4.2% the following month, 5% in May, and by December 2021 inflation had spiraled to 7%.
Where was the Federal Reserve then and why did they not act in any way with any incremental raise that would have at least slowed the pace down?
Regardless of the assumption by the Federal Reserve that rising inflation was transitory, they did act most inappropriately by their inaction waiting a full year when in March 2022 they finally acted and raised rates by a whopping quarter percent.
Needless to say, inflation had already run to 8.5%. The Fed had more than ample time to begin an inflation reduction program and if they had we would not be facing the scenario we face today. Now they want to keep rates elevated for longer when they should have raised rates much sooner and most likely would have avoided the dilemma we currently face.
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Wishing you as always good trading,
Gary S. Wagner