(Kitco News) - The gold market is holding support above $3,900 an ounce after seeing its worst monthly performance since the start of the year and its worst October since 2008. Although prices continue to struggle, one bank sees last month's sell-off as a potential buying opportunity, as the fundamental factors supporting higher prices remain firmly in place.
In his latest precious metals commentary, Carsten Fritsch, Commodity Analyst at Commerzbank, said that gold's recent weakness appears overdone, particularly as the precious metal has become disconnected from traditional market fundamentals.
"We consider the price decline in gold to be excessive and unwarranted. The arguments in favour of a rising gold price remain valid," he said.
Fritsch's optimistic comments come as gold continues to recover from Friday’s nearly 4% drop as prices hit a more than one-year low of $3,870 an ounce. The sell-off pushed October's losses to nearly 7%.
Although rising interest rates and persistent inflation have weighed heavily on gold throughout the year, Fritsch said these factors cannot fully explain the latest selling pressure.
He noted that gold's decline coincided with oil prices rising to a six-month high, raising concerns about another acceleration in inflation. While gold has traditionally been considered an inflation hedge, higher energy prices have instead created additional headwinds by increasing expectations that the Federal Reserve will continue raising interest rates.
Following its first rate hike in September, Commerzbank expects the U.S. central bank to raise interest rates again in December, supported by resilient economic activity and inflation that remains well above its 2% target.
However, Fritsch noted that the relationship between gold and interest rates has recently broken down.
Following last week's monetary policy meeting, when the Federal Reserve left interest rates unchanged, expectations for further tightening eased, pushing nominal and real bond yields lower. Under normal circumstances, declining yields should support gold by reducing the opportunity cost of holding the non-yielding precious metal.
Instead, gold prices continued to fall sharply.
According to Fritsch, the disconnect suggests that broader financial market liquidity pressures, rather than interest rates alone, were responsible for the latest decline.
He explained that last week's sharp correction in technology stocks, following disappointing corporate earnings, likely forced some investors to liquidate gold holdings to cover equity losses and meet margin calls.
The selling pressure may have been particularly pronounced in gold-backed exchange-traded funds and futures markets, where institutional investors can quickly liquidate positions to raise cash. At the same time, data from the Commodity Futures Trading Commission showed that speculative investors reduced their net bullish gold positions to a five-month low in October.
Despite the recent volatility, Commerzbank remains constructive on gold's longer-term outlook, particularly as the U.S. government's deteriorating fiscal position continues to undermine confidence in the sustainability of higher interest rates.
Fritsch highlighted that the U.S. federal budget deficit exceeded 6% of gross domestic product in the last fiscal year, while the country's debt-to-GDP ratio has reached 100%, approaching levels last seen following World War II.
He added that meaningful fiscal consolidation appears unlikely, regardless of the outcome of the U.S. midterm elections.
The bank also sees growing tension between the Federal Reserve's efforts to contain inflation and the government's need to manage its expanding debt burden.
Higher interest rates would increase the cost of servicing federal debt, adding further pressure to an already strained fiscal outlook. Fritsch suggested that these constraints could ultimately limit how aggressively the Federal Reserve can tighten monetary policy, even if inflation remains elevated.
"Even though the Fed has resisted this, it is unlikely to be able to raise interest rates by as much as would actually be necessary to combat high inflation, given the debt problem mentioned above," he said. “Such a scenario points to a higher gold price.”
See live precious metals prices for gold, silver, platinum and palladium — in USD, CAD and 12 more currencies.
