Hawkish Fed again slows down gold

Market report Michael Blumenroth – 04.11.2022

Weekly Market Report

Central banks are once again determining market movement. Most recently, the central banks of Canada and Australia have been sizing down on their interest rate hikes, while the ECB last week signalled that future interest rate steps will likely turn out less pronounced than expected. This message was matched by the Fed upon release of its post-meeting statement at 19:00 on Wednesday. At the subsequent press conference, however, Fed Governor Jerome Powell shocked some market players who had interpreted this as a signal for an imminent halt of the rate hike cycle. Although the individual interest rate steps would probably be smaller, he emphasised several times that the markets were currently underestimating the final interest rate – at which the Fed would end the rate hike cycle for the time being.

Rising US yields and firm dollar

In other words: the likelihood that the next rate hike will be 0.50 percentage points rather than 0.75 percentage points in December has increased significantly, while the hopes of some market participants that this or a subsequent small rate hike would complete the cycle were significantly dampened. The movement of gold prices between the publication of the Fed statement and the end of the Powell press conference very clearly shows the source of the headwind gold is currently facing. Immediately after the hint of smaller interest rate steps to follow, gold jumped from around 1,645 to nearly 1,670 US$ per ounce. Still during the press conference, the precious metal dropped to 1,638 and with the subsequent further rise in US yields and the firmer US dollar, a further US$20, its lowest level within the past two weeks. 

This morning sees gold prices recover

While gold traded at US$ 1,621 per ounce last Friday morning and hit its two-week high of around 1,675 on 26 October, it had mostly traded within sight of the 1,650 mark in the run-up to the Fed meeting. It slipped as low as 1,617 yesterday afternoon and has since recovered firmly to around 1,648 at just before eight this morning. There is no obvious fundamental reason for this morning’s gains; perhaps prices are benefiting from speculation that China’s zero-covid policy will soon end, which would benefit local business activity and the overall economy.

The Xetra-Gold price has seen less volatility over the past few days within regular trading, as the Fed meeting took place after the Frankfurt close of trading. While Xetra-Gold stood at 53.40 € per gram Friday morning two weeks ago, this already marked the approximate mid-point of the past two weeks’ trading range of 54.05 to 52.95. The current euro to US dollar exchange rate also seems to be settling somewhat, between 0.97 and 1.00. This morning, Xetra-Gold was expected to start trading at around 54.15 € per gram due to the overnight upward movement.

US inflation data, up for publication next Thursday, will be important for market development.

I wish all readers a relaxing weekend.

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