While this week’s market commentary comes a day early for scheduling reasons, the highlight of the week, i.e. the Fed meeting, took place yesterday evening.
As expected and unanimously decided, the Fed left the key interest rates at 5.00 to 5.25 per cent while signalling possible further interest rate hikes. The projection for the key interest rate at the end of this year was raised from 5.1 to 5.6 per cent, which means that, on average, Fed members expect two more rate hikes of 0.25 percentage points each. Only two of 18 decision-makers believe there will be no further rate increase, whereas three representatives would even prefer three or four. Due to higher growth and inflation forecasts, interest rate projections for 2024 and 2025 were also raised to 4.6 and 3.4 per cent, respectively.
Strong US dollar and US bonds weigh on gold price
In the press conference following the rate decision, Fed Governor Jerome Powell confirmed that the Fed is likely to lean towards a rate hike next month unless the economy and inflation cool more significantly. He reiterated the data dependence of future interest rate decisions. Interest rate futures markets continue to price in a maximum of one more rate hike, despite the raised Fed projections – so nothing has changed since before the Fed meeting. However, US Treasuries yields (having reached their highest level since early March or prior to some US regional banks’ difficulties) and the US dollar rose after the meeting, which slowed the gold prices and in some cases sent them on a downward slide.
Medium-term upward potential for gold
The fact that US consumer price inflation dropped from 4.9 to 4.0 per cent in May supported gold prices only in the short term, as a sharp decline had already been expected in advance. It should be noted, however, that the Fed members’ projections are snapshots of the current situation. If inflation rates continue to fall or the US economy weakens, interest rate hikes could in turn also fail to materialize, which would provide a tailwind for gold prices. As Deutsche Bank considers Fed rate cuts likely from the second quarter of 2024, we expect upward potential for gold prices in the medium term. Based on our current knowledge, we believe that the path could then lead to price gains of more than 10 per cent.
While gold was still trading at 1,964 US$ per ounce last Friday morning and as high as 1,973 in the afternoon, it mirrored the rise in yields in the US, dropping to 1,940 by midweek and 1,929 on Thursday morning after the Fed meeting on Wednesday. At 12 noon on Thursday, it had only slightly recovered to 1,933.
The Xetra-Gold price is also lower. From last Friday morning at 58.65 € per gram and its weekly high of 58.80, Wednesday’s Fed meeting caused a drop to 57.30. A quick recovery failed to materialize, and by midday Thursday, Xetra-Gold was trading at 57.35.
After the US bank holiday on Monday, the movements in the bond and currency markets will likely continue to point the way for gold. In addition to the Bank of England, several other exciting central bank decisions are ahead next week.
I wish all readers a pleasant summer weekend.