Spot gold gave back all of last week’s gains, and closed down again after two weeks, hitting a new low of $1,642.28 per ounce during the session since September 29. Despite concerns from all walks of life that the Federal Reserve has raised interest rates excessively, U.S. inflation data continued to run at a high level, completely dispelling market expectations for the Federal Reserve to slow down the pace of interest rate hikes.
As of press time, spot gold fell 2.31% to US$1,656.84 per ounce; the US dollar index rose 0.13% to 112.918.
U.S. inflation wipes out gold bulls
The annual rate of the overall CPI in the United States in September was 8.20%, higher than the expected value of 8.10%, and lower than the previous value of 8.30%; the annual rate of the core CPI in the United States in September was recorded at 6.60%, the highest since August 1982, the expected value and the previous value respectively were 6.50% and 6.30%. Rents have risen the most since 1990, and food costs have risen.
The U.S. PPI rose more-than-expected in September earlier this week, suggesting inflation is likely to remain uncomfortably high for some time. Combined with a still-strong labor market and steady wage growth, the Fed has reason to continue its aggressive tightening policy.
Traders widely expect the Fed to raise interest rates by a fourth straight 75 basis points at the end of its November policy meeting. The Fed also plans to raise interest rates further next year, when it is expected to hit 4.6%. The more aggressive the Fed’s hawks, the less attractive gold is.
“Continued rises in inflation suggest that the Fed is unlikely to preemptively stop raising rates, suggesting that restrictive rates will remain in place for a long time, and a continued downward trend in gold prices may prevail,” analysts at TD Securities said.
Edward Meir, analyst at ED&F Man Capital Markets, said: “Inflation will remain very sticky for some time and will weigh on gold prices … in the short term, gold will be in a range of $1,620 to $1,740. Meir added that on the charts, gold is still weak and any rebound in gold prices will be short-term as the Fed remains concerned about inflation and remains very hawkish.
Fed minutes assess rate hike path
The minutes of the Fed’s September policy meeting were also released this week. The minutes showed that Fed policymakers agreed they needed to take a tighter policy stance and then hold it there for a while to lower inflation. Many Fed officials “stressed that the cost of taking action to lower inflation may outweigh the cost of doing too much.” Many officials said they had raised their assessment of the path of rate hikes that might be needed to achieve the committee’s goals.
“It’s clear that they will keep raising rates because they seem to feel that if they don’t, inflation could really get out of hand,” said Juan Perez, U.S. MONEX trade director. They do think you need to get to some very high rates to really cool the economy. Officials are weighing the risk of raising rates too much, but that’s not the number one concern right now, the number one concern remains high inflation, as long as the Fed is willing to fight it, Then it will be good for the dollar.”
If the U.S. economy, which is still fairly resilient for now, starts to weaken, gold could be in focus, but there must be clear signs that the Fed is willing to walk away from raising interest rates and slowing inflation, said Stephen Innes, partner at SPI Asset Management.
Commerzbank strategists expect gold to continue to face selling pressure as rising yields push the dollar higher. “Market expectations for further rate hikes by the Fed have pushed U.S. real rates based on market inflation expectations to 1.7%, the highest level since August 2009, reducing gold’s attractiveness as a non-yielding asset. As long as the U.S. dollar brings With continued headwinds and rising (real) yields, gold is likely to remain on the defensive.”
Worry about excessive policy tightening
There are growing concerns that the current pace of interest rate hikes by the Federal Reserve is weighing on the global economy and has outstripped the central bank’s ability to monitor its impact. A poll of 45 professional forecasters by the National Association for Business Economics (NABE) showed that just over half said: “The biggest downside risk to the U.S. economic outlook is that monetary policy is too tight.”
Fed Governor Brainard highlighted some evolving risks, including possible pressure on financial markets and the possibility of a faster-than-expected U.S. economic slowdown. The deceleration was greater than expected.”
There are also signs that U.S. consumer household balance spending is falling faster than previously estimated, which could signal a slowdown in consumer spending, she said. And noted that the sharp shift in risk sentiment “could be magnified, especially given the fragile liquidity in core financial markets”.
Chicago Fed President Evans also acknowledged that recent heightened market volatility has created new difficulties for decision-making, but argued that because of the “unusual interaction” between the job market and supply chain, “labor market pressures have had a stronger impact on inflation than usual. bigger.”
In any case, the Fed has ruled out a premature shift in policy in 2023. Expectations of aggressive rate hikes should put upward pressure on real yields, keeping the dollar, already near multi-decade highs, on track for further appreciation. In this environment, it is difficult for gold to perform well.
OECD: Fed should show flexibility
The Federal Reserve should adjust policy as needed as it monitors the impact of global events and its actions on the domestic economy as the U.S. economy faces heightened uncertainty due to rapidly rising interest rates, the Organization for Economic Cooperation and Development (OECD) said on Wednesday.
“Risks and uncertainties are greater than usual and tilted to the downside,” the OECD said in a biennial survey of the world‘s largest economies. It forecasts the U.S. economy will grow 1.5 percent this year and 0.5 percent in 2023. %.
In its report, the OECD noted that inflation is posing a “significant challenge” to the U.S. as it has expanded from goods to services, forcing the Federal Reserve to remain on the path of aggressive monetary tightening. “High inflation could persist unexpectedly, prompting more aggressive monetary policy tightening, and further disruption to global markets from the Ukraine war or other factors could also have a significant negative impact on real GDP growth and lead to higher inflation.”
On the other hand, supply constraints and falling commodity prices could still lead to a quicker-than-expected easing of high inflation, the OECD noted. “It is necessary for the Fed to show considerable flexibility, and careful monitoring of the global effects driving high inflation and the impact on the economy of tighter financial conditions will benefit policy deliberations.”
Aggressive bearish traders in the gold market should tread cautiously amid concerns over economic headwinds due to rapidly rising borrowing costs and geopolitical risks. The appropriate approach is to wait for confirmation that the main bears are launching strong selling pressure below $1,660 before entering the market.