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Brien Lundin: Gaza war won't hold gold up but might force Fed's hand
By Brien Lundin, Editor
Gold Newsletter, Metairie, Louisiana
Friday, October 13, 2023
(Excerpted by permission.)
With Israel preparing to cross into Gaza, no one wants to not own gold going into the weekend.
Safe haven assets are soaring today, but for this rally in gold to hold, we'll need the geopolitical situation to force the Fed's hand.
A $50 day in gold is a rare event, and it's one that obviously has many gold bugs dancing a jig.
Their euphoria should be tempered by recognition of the cause of this price spike -- which is Israeli forces massing for an imminent march into Gaza.
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As I've repeated ad infinitum for many years, rushing into gold on the basis of a geopolitical event is almost always a losing proposition. With a regularity that's deflating for doom-and-gloomers, peace always seems to break out.
And when it does, only the nimblest of traders are able to sell their gold near the peak of the run and pocket any profits at all.
The simple fact is that there's no rationale for the global price of gold rising due to some non-financial, non-monetary crisis. And that's why these sorts of rallies always seem to end up with the price of gold falling back to where it was, or even lower.
All this said, this time could be different. Why?
Because this geopoltical crisis has a chance of forcing a shift in Federal Reserve monetary policy -- at least a declared "ceasefire" in the Fed's rate-hike crusade, if not a full pivot.
As you know, the markets have been anticipating that some sort of an event, precipitated by the harshest rate-hike cycle ever coming on the heels of the easiest monetary policy in history, would force the Fed to retreat.
Like race horses chomping at their bits in the starting gate, the stock, bond, and metals markets have been straining to price in rate cuts. There have been, in fact, a few false starts, with the horses forced to re-enter the starting gates, to again await whatever the next crisis catalyst may be.
There is no shortage of candidates, including the banking system, corporate bankruptcies, soaring debt-service costs, and, of course, the oncoming recession.
I have maintained that the next crisis was likely to be spawned by something out of left field, something few if any were considering.
The Hamas attacks on Israel would fit that description perfectly.
So good news for gold bugs will once again come with bad news for the world.
That's likely to come, unfortunately, but if it doesn't prompt the Fed to retreat, we'll likely see the price fall right back down.
Remember, this is precisely what happened after Russia invaded Ukraine.
In that situation, though, the Fed was just beginning its crusade of rate hikes and
inflation was still raging. Today the Fed has reached or is about to reach the end of that cycle and would look favorably at any excuse to exit.
So this time could be different for that reason.
There's also the chance that this rally goes far enough to get gold to a new record high above $2,060, and that brings in enough buying to establish the new bull market that gold is due in any case.
We'll see, but caution remains the buzzword. ...
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