On Friday (February 24), the price of gold maintained a fluctuating and falling trend this week. The Fed’s hawkish minutes, Fed officials’ speeches in a hawkish tone, and good U.S. economic data put pressure on the short-term trend of gold prices. However, geopolitical tensions support gold prices, while reports from the World Gold Council are bullish on the long-term outlook for gold prices.
Looking ahead to next week, investors also need to pay attention to important U.S. economic data, including consumer confidence and non-manufacturing PMI, as well as the tone of Fed officials’ speeches. Investors should also keep an eye on factors such as geopolitical situations and trade conflicts. Next, let us review some news events that affect the trend of gold prices this week, so as to provide a reference for predicting the future.
Gold price daily chart trend
US dollar index daily chart trend
Hawkish content of Fed minutes puts pressure on gold prices
Minutes from the Fed’s first Federal Open Market Committee (FOMC) meeting of the year, released this week, were hawkish in tone. Increased the possibility of the Fed raising interest rates sharply. Up to now, the Federal Reserve has raised interest rates eight times in a row, with a cumulative rate hike of 450 basis points.
In the early hours of February 23, Beijing time, the Federal Reserve announced the minutes of its interest rate meeting from January 31 to February 1. The minutes showed that almost all participants agreed that a 25 basis point rate hike was appropriate, but a minority supported a 50 basis point hike. While there are signs that inflation is falling, it is not enough to offset the need for further rate hikes, which remain well above the Fed’s 2% target. It follows that the labor market remains very tight, leading to continued upward pressure on wages and prices.
The minutes show that the Fed believes that the upside risk of inflation is a key factor affecting the economic outlook. What is different from the previous one is that this time the interest rate guide stated that when judging the degree of future interest rate hikes, a series of factors such as the hysteresis of the impact of interest rate hikes should be taken into account. Moreover, this time when it reiterated that inflation is still high, it added the rhetoric that inflation has eased to a certain extent.
The minutes showed that there was a general consensus among participants that future decisions would continue to be based on incoming data and its implications for economic activity and the outlook for inflation. Some participants believed that recent economic data suggested that the likelihood of persistently subdued economic growth had increased and that inflation would decline over time to the long-term 2 percent target, although some noted that the economy would enter a recession in 2023. The odds are still high. Turning to risks to financial stability, several officials stressed that the lengthy negotiations to raise the debt ceiling could pose significant risks to the financial system and the broader economy.
Economists at ING expect the dollar to remain strong in the short term and gold prices to come under pressure. The minutes were largely hawkish. There is consensus that further rate hikes are needed, and that inflation remains unacceptably high. There is no hint of a pause, and nothing to shift the market’s pricing of 25 basis points of rate hikes at the Fed’s March, May and June meetings. This backdrop could keep the dollar supported in the short-term and likely extend into the March 22 FOMC meeting.
Gold prices weigh on Fed officials’ hawkish tone
Fed officials continued to deliver hawkish rhetoric. St. Louis Fed President Bullard advocated for aggressive rate hikes at the March monetary policy meeting to bolster its tools to fight persistent inflation.
The Federal Reserve’s “No. 3” Williams said that the 2% inflation target is the key to policymaking. The Fed is “100 percent” committed to getting inflation back to its 2 percent target over the next few years.
“Our job is clear: to ensure the restoration of price stability, the foundation of a strong economy,” Williams said. Demand in the U.S. economy continues to exceed supply, and price pressures remain in services excluding food, energy, and housing. He believes that due to the continued demand for commodities and the unresolved global supply chain problems, it is difficult for prices to fall as quickly as some people expect. Williams emphasized that the Fed does not want to change the anchor point of inflation expectations, and sticking to the inflation target is crucial.
Also, Fed policymakers see final interest rates around 5.4%. According to CME’s “Fed Watch” tool, the probability of the Fed raising interest rates by 25 basis points in March to the range of 4.75%-5.00% is 73.0%, and the probability of raising interest rates by 50 basis points to the range of 5.00%-5.25% is 27.0%; The probability of a cumulative rate hike of 25 basis points in May is 0%, the probability of a cumulative rate hike of 50 basis points is 72.7%, the probability of a cumulative rate hike of 75 basis points to the range of 5.25%-5.50% is 27.2%, and a cumulative rate hike of 100 The probability of a basis point to the 5.50%-5.75% range is 0.1%.
Economists at TD Securities expect the final rate to hit 5.25% at the May Fed meeting. The minutes of the Federal Reserve meeting indicated that the central bank is not finished in further raising interest rates, and is expected to maintain a restrictive policy stance for the foreseeable future. We expect 25 basis points of interest rate hikes in March and May, and the Fed will determine the target range for the final federal funds rate at 5.00%-5.25% by May.
The agency expects, and we do note that there is considerable upside risk to our final rate forecast, with upcoming releases of CPI and personal consumption expenditures inflation and a strong labor market likely to weigh on the Fed continuing to raise rates after the May meeting . U.S. economic growth will be weaker later this year and into 2024 as the Federal Reserve is likely to keep policy restrictive for longer.
Optimistic U.S. economic data puts pressure on the short-term trend of gold prices
The second estimate released by the U.S. Bureau of Economic Analysis (BEA) on Thursday showed that real gross domestic product (GDP) grew at an annualized rate of 2.7% in the fourth quarter, lower than the initial estimate and market expectations of 2.9%.
The BEA explained in its report that the updated estimate primarily reflects a downward revision to consumer spending, which was partially offset by an upward revision to nonresidential fixed investment.
Growth in the U.S. economy will slow slightly in late 2022, largely as consumers cut back on spending. Consumer spending, the main engine of the economy, grew at an annual rate of 1.4% instead of the 2.1% initially reported. Economists say the U.S. will struggle to match fourth-quarter performance in the first three months of 2023, even if the economy is so flat in the fourth quarter. According to early economic data, the expansion rate of the US economy will slow down sharply, or even contract. Rising interest rates and high inflation are forcing consumers and businesses to cut spending and investment, especially in rate-sensitive sectors like housing and construction.
According to data released by the US Department of Labor, as of the week of February 18, the number of initial jobless claims was 192,000, slightly better than market expectations of 200,000. The previous week’s data was revised from 194,000 to 195,000.
The number of Americans filing new claims for jobless benefits fell last week, suggesting the labor market remains historically tight. Initial jobless claims have remained low in recent months despite a recent wave of layoffs in technology, finance and other industries. This may be because workers are rapidly finding new jobs at a time when demand for labor outstrips available labor. Other recent economic indicators have shown little sign of a slowdown in the U.S. economy.
The geopolitical situation is very serious, and the long-term outlook for gold prices remains supportive
Volatile geopolitical tensions between Russia and Ukraine have reached their one-year anniversary and risk escalation. Geopolitical issues have become more important recently, and the involvement of the United States and China actually puts the Russian-Ukrainian situation in a bad direction.
While U.S. President Joe Biden believes the Russian president is not ready to withdraw from an international treaty to use nuclear weapons, concerns over a Ukraine-Russia war are far from over, with recent developments in the West and China exacerbating the problem. In this regard, US media reported that the United States is considering publishing information that China may transfer weapons to Russia.
Earlier, comments from Chinese diplomat Wang Yi and Russian President Vladimir Putin weighed on market sentiment. According to reports, Chinese diplomat Wang Yi met Russian President Vladimir Putin on Wednesday and said they are ready to deepen strategic cooperation with Russia. The Chinese diplomat also added that the relationship between the two countries will not bow to pressure from a third country.
It was also reported that US senators have pushed to restrict flights and airlines flying over Russian territory. The news stated that the chairman of the Senate Foreign Relations Committee and the top Republican on the committee urged the Biden administration to stop Chinese airlines and other non-US airlines from flying over Russia via US routes.
It was also reported that a year after the Ukraine war broke out, Russia remained severely isolated at the United Nations. On the one-year anniversary of Russia’s invasion of Ukraine on Thursday, the United Nations General Assembly overwhelmingly isolated Russia, calling for a comprehensive, just and lasting peace and again calling for Russia to withdraw its troops and stop fighting, sources said.
U.S. Treasury Secretary Janet Yellen said on Thursday that “sanctions imposed alongside Western allies are isolating Russia’s economy and reducing its productive capacity.” The U.S. will provide Ukraine with $10 billion in new economic aid in the coming months. Economic assistance from the United States and allies has enabled Ukrainian resistance by keeping the government functioning and funding critical public services.
The IMF’s action in providing a full financing package for Ukraine is critical and will push for “sustained strong support” at the G20 meeting. The global economic outlook has improved since the G20 meeting in October, and some of the spillover effects of the war in Ukraine have eased. Western price caps on Russian oil have helped cut Moscow’s oil revenues by 60%.
Outlook remains positive for gold prices in 2023, World Gold Council report says
The “Global Gold Demand Trends Report” previously released by the World Gold Council shows that the annual demand for gold in 2022 will rise to the highest level in nearly 11 years. Based on the data analysis and professional insights of various dimensions of the gold market, we believe that this is the result of multiple effects such as the vigorous purchase of gold by central banks of various countries, the strong purchase of individual investors, and the slowdown in the outflow of gold ETFs.
We published our 2023 Gold Outlook in December, and the data in this Q4 2022 Global Gold Demand Trends report (and YTD data where available) are consistent with the central scenario of that outlook. We still see upside potential for gold demand in 2023 outweighing downside risks due to growing risks of recession in the US and Europe.
Individual gold investment in Asia is expected to experience strong growth. Low demand for gold ETFs and OTC transactions in 2022 is likely to set the stage for a modest recovery in gold investment in 2023. Rising interest rates and a stronger U.S. dollar both pose major hurdles to investing in gold in 2022, but gold has held up for much of the year and reignited investor interest. Rising rates will no longer pose a significant threat to gold investments as investors identify a likely peak in interest rates. In addition, we believe continued U.S. dollar weakness, heightened recession risk, strengthening bond-to-equity correlation, and heightened geopolitical risk are all likely to sustain investor interest in gold, driving investor adoption into 2023. An active investment strategy that allows this year’s gold investment to exhibit upside potential as time progresses.
In 2023, jewelery demand is expected to improve further from a resilient 2022. The demand suppressed by the epidemic in the Chinese market will be released, which will inject growth momentum into the demand for gold jewelry driven by economic growth; however, we still need to be vigilant against the uncertainties brought about by repeated epidemics. The deteriorating global economic situation may drag down the demand for gold jewelry in regions other than China, which may weaken the positive impact of the huge foundation of the Chinese market.
It may be difficult for the central bank to purchase gold in 2023 to reach the level of 2022, but it may still be better than expected. The decline in the central bank’s total reserve assets may limit the room for growth in its gold allocation.
It remains difficult to forecast central bank gold buying demand, as such demand is often policy-driven and does not always respond to common economic drivers – although we often use these factors to analyze other gold demand. Separate reports (often with a lag) on central bank gold holdings suggest that surprises are highly likely this year. However, slower growth in total reserves could put pressure on some central banks, affecting their gold quotas. Therefore, we believe that the rate of central bank gold purchases in 2023 may be more moderate.