Gold defies central banks’ tighter monetary policy

Market report Michael Blumenroth – 17.12.2021

Weekly Market Report

The past week has clearly been marked by the central banks’ actions, with all eyes on the Fed meeting in Washington. US Federal Reserve governor Jerome Powell in particular had recently indicated that, due to persistently high inflation rates, a turnaround in the central bank’s extremely loose monetary policy was imminent. And thus words were followed by deeds. As of January, bond purchases will be cut back twice as fast as in November and December. Whereas three months ago only half of the members of the Monetary Policy Committee had expected a single rate hike at all in 2022, the majority of members now anticipate three rate hikes for 2022, three more in 2023, and two in 2024, which is above pre-meeting market expectations.

Gold prices defy rate hikes

Fellow UK monetary watchdogs also surpassed market expectations yesterday by raising the base rate in a first step and signalling further upcoming rate moves. Interest rate hikes by a number of other central banks this week (Norway, Chile, and probably Russia and Mexico today) had already been priced in by the markets. Normally, rate hikes or rising expectations of hikes dampen the upward momentum of gold prices. After all, they usually cause both bond yields and currencies to rise, which was also the case immediately after the Fed meeting. This development was, however, followed by counter-movements, and many market participants had premeditated this outcome. In addition, trading activity has been sluggish as the end of the year is approaching. The US dollar dropped slightly, as did US bond yields. Gold prices, on the other hand, rose.

Gold in US dollars and euros

From 1,775 US$ per ounce last Friday, the gold price dropped to its weekly low at 1,754 in an initial, immediate reaction to the outcome of the Fed meeting, but recovery was swift. The weekly high to date was reached this morning at around 1,807.

The Xetra-Gold price developed favourably, initially dropping from 50.50 € per gram to a weekly low of 50.25 on Tuesday and recovering to 51.15 yesterday. This morning, it might even reach 51.25 at the start of trading.

With decreasing liquidity and increasing position closures before the end of the year, markets might well see some movement in the run-up to the holidays.

I wish all readers a happy fourth Advent weekend.

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