Gold has lost more than 4% in September, its biggest monthly drop since Trump's 2016 election win
- Gold has fallen by 4% in September, its biggest one-month drop since Donald Trump won the presidential election in November 2016.
- Investor jitters over the election, the economy and the equity markets have boosted the dollar and undermined gold this month, but the argument for higher prices remains in place, analysts say.
- "There's everything to play for in the fourth quarter," Saxo Bank head of commodity strategy Ole Hansen says.
Gold might be a port in a financial-market storm, but the turbulence that has shaken the broader markets this month has stripped over 4% off the value of an ounce of metal, the largest monthly decline since November 2016, when Republican Donald Trump won the presidential election.
There are a number of reasons why gold has suffered, even though the stock market has come under fire. Gold does tend to benefit when investors lose confidence in equities and flock to the relative safety of the likes of government bonds, the Japanese yen or the Swiss franc.
However, if investors get angsty enough over the outlook for the economy and corporate profits, it can prompt them to shed so-called risk assets in favor of cold, hard cash, which boosts the dollar.
The gold price has fallen by 4.2% so far this month, marking the largest one-month drop since November 2016, driven largely by a stronger dollar and, almost more crucially, by an increase in borrowing rates adjusted for inflation.
At around $1,890 an ounce, the price is nearly 9% below August's record around $2,090 an ounce, but this is hardly a "riches to rags tale" at this point, according to Saxo Bank head of commodity strategy Ole Hansen.
"Right now the story that drove gold to these levels has not gone away. It's on pause," he said. "We need to see signs of inflation emerging and we need that to stay with us as a theme, and see renewed weakness in the US dollar," he said.
Gold usually trades in the opposite direction to the dollar. This inverse relationship between the two broke down earlier this year, when investor concern over the impact to the economy from the coronavirus pandemic was at its worst.
That correlation between the two has reasserted itself over the course of September, meaning the dollar's 2% rise this month has added to the pressure on gold.
Market-based measures of volatility suggest investors are concerned that the election in early November will not yield a clear winner, which would undermine the strength of the dollar.
The first of three televised debates between Trump and Democrat opponent Joe Biden on Tuesday proved heated and "chaotic", according to market watchers. The exchange between the two did nothing to allay any brewing concern over an unclear result or the peaceful transfer of power, should Biden win.
"We believe that such a scenario, involving weeks of uncertainty, would pose a risk to the dollar, which should benefit gold significantly," Commerzbank strategist Carsten Fritsch said.
The dollar is still down around 3% so far this year, after the Federal Reserve unleashed trillions in fiscal stimulus and cut interest rates to near zero. With little to no yield in US financial instruments, gold has drawn in record levels of investment this year.
Gold's lack of yield means that when US rates are low, investors forfeit less than they otherwise would. Holdings of gold in exchange-traded funds have soared to record highs and even this month's drop in price has not changed that.
With no chance of a rise in US interest rates any time soon, an uncertain outcome to an acrimonious race for the White House and the Fed working to encourage a rise in inflation, gold's September slump may proved short-lived.
Swiss investment bank UBS said this week it believes gold will hit $2,000 an ounce again before the end of the year.
"There's all to play for in the fourth quarter," Saxo Bank's Hansen said.