Gold prices fall as central banks keep delivering surprise rate hikes
COMEX Gold prices are poised for the steepest weekly decline since January, as major central banks keep hiking rates and markets are pushing back against rate cuts later this year.
The move came against the backdrop of elevated core inflation and a tight jobs market in most economies. Earlier in March, interest rate swaps were pricing in almost 100 bps of rate cuts for the year, as the banking crisis unfolded.
However, now not even a single 25 bps rate cut is priced in for 2023, justifying the recent plunge in gold prices after notching a 33-month high of $2085.4 per troy ounce in May.
Dollar index has eased from recent highs, partly due to hawkish peers like ECB and BOE, whereas the US 2-year treasury yields, a proxy for short-term rates, are hovering near 16-year highs touched in early March.
Meanwhile, the yield on UK two-year bonds rose above 5% for the first time since July 2008, as investors ramped up their bets on how fast and how far the Bank of England will raise interest rates.
Rising yields across the board raise the opportunity cost for holding the non-yielding bullions, which can be seen in the ETF activity.
Holdings at the SPDR gold trust ETF have been declining over the past few weeks and have seen outflows of over 11 tonnes from 941. 29 tonnes in May, compared with 929.7 tonnes as on 22nd June.During his congressional testimony, the US Fed Chair Jerome Powell emphasized on the importance of fighting inflation and stated that nearly all FOMC participants expect that it will be appropriate to continue raising interest rates this year and perhaps two more times.
Powell also said rate cuts won’t happen anytime soon. Meanwhile, two Federal Reserve policymakers said tackling US inflation would be their top priority if confirmed to roles at the central bank.
Governor Lisa Cook echoed Fed Governor Philip Jefferson’s remarks, saying she “will stay focused on inflation until our job is done.” Dovish comments from Atlanta President Raphael Bostic and Chicago Fed President Austan Goolsbee were shrugged off by market participants.
The treasury yield curve is now inverted more than a percentage point, as markets are pricing in higher rates for the medium-term.
Following recent rate hikes by the European Central Bank, Reserve Bank of Australia, and the Bank of Canada, the Bank of England on Thursday surprised markets with another 50-bps rate hike, taking the benchmark rates to 5%.
Money markets are pricing-in terminal rates higher than 6% in the UK, amid stubbornly high inflation. The hawkish stance from the majority of the central banks shows that Fed is not an outlier here, and this might keep the dollar supported unless US economic data comes in pretty weak, warranting rate cuts.
Data showed that the US manufacturing sector is already in a slowdown, Labour market is cooling, but still showing signs of resilience.
Speeches from major central bank chiefs, Fed’s preferred PCE price index, US Final GDP estimate, and goods orders are the economic events to be watched for the coming week.
The lack of proper forward guidance, the official split over rate hikes, and the data-dependent approach by the Fed is adding to market uncertainty.
Having said that, prospects of higher rates for 2023 are also raising the odds of a hard landing, with more economic pain, which might be a positive factor for gold prices in the long term.
Amid a slew of hawkish statements expected next week coupled with an elevated dollar and rising yields, we might see gold prices trading sideways to bearish for the coming week.
(The author is VP-Head Commodity Research at Kotak Securities Ltd)
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