Over the past week, gold investors have seen joy and sorrow go and in hand. Due to turbulence across the stock markets at the beginning of the week, prices for the precious metal initially rose to their highest level since mid-November, amid unusually strong intraday volatility, especially for leading US stock indices. Gold, thus, was in high demand as a safe haven, especially among major investors. However, the press conference held by chair Jerome Powell to follow up on the Fed meeting caused gold investors’ celebratory mood to come to an abrupt end on Wednesday evening.
Fed: first interest rate hike in March?
Powell pointed out that the US economy, and in particular the labour market, were in much stronger shape than at the beginning of the last rate hike cycle in 2015. He expects inflation rates to remain high for longer than previously anticipated and signalled that interest rate hikes will be more frequent and substantial in 2022 than priced in by the markets. They had previously anticipated four interest rate hikes of 0.25 percentage points. In response to a reporter’s question, Powell did not rule out the possibility of rate hikes at each of the upcoming meetings. Including March, the Fed is scheduled to meet seven more times this year.
More restrictive monetary policy than expected
Powell also signalled a reduction of the balance sheet soon after the first rate hike; a decision could possibly be made in the second quarter. The message received by the markets: monetary policy is likely to tighten more substantially than currently priced in. During the press conference, yields on two- and five-year US treasuries rose by around 0.12 percentage points to their highest level since January 2020, and the US dollar gained significantly due to the further rise in interest rate expectations. Neither served to support gold prices.
Gold drops below 1,800 US$ per ounce mark
Initially climbing from 1,838 US$ per ounce last Friday morning to 1,854 on Tuesday on the back of market volatility, gold retreated to US$1,792 yesterday afternoon in the wake of the Fed press conference. This morning, the precious metal trades slightly higher, at 1,798.
Xetra-Gold: weak euro cushions losses
While the gold price in euro also turned south, the weak euro-US dollar exchange rate (lowest level since June 2020) absorbed some of the momentum. Xetra-Gold traded at 52.15 € per gram last Friday afternoon and reached its weekly high of 52.80 on Tuesday. The Fed press conference, however, left its mark and caused gold to slide to 51.65 yesterday. It was expected to kick off trading this morning around 51.90 € per gram.
Inflation remains central concern
After the Fed meeting, market participants are now turning their attention to the ECB and Bank of England meetings coming up next Thursday – again with a focus on inflation and the central banks’ reactions – and are also keeping a watchful eye on eurozone inflation data, due next week Wednesday.
I wish all readers a pleasant weekend.