Esperio: Central Bankers Slash Gold Prices

Gold prices are seen to be losing momentum as central banker are increasing their hawkish pressure.

The pressure is mounting after the Federal Reserve (Fed) Chairman Jerome Powell unexpectedly said the U.S. policymaker is considering two or more interest rate hikes in 2023. This is a clear enforcement of the hawkish stance of the policymakers as most of them indicated to only two rate hikes by the end of this year.

“A strong majority of Committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year,” said Powell. His anxiety was clearly seen amid still high numbers of inflation in the United States. The favourite indicator of the Fed – the Personal Consumption Expenditure (PCE) Index rose in May to 4.6% YoY from 4.4% in April and 4.2% in March. More importantly, the Core PCE index, which is calculated without volatile prices of food and energy, is also seen to be high at 4.7%. 

The Fed is likely disappointed with this upward inflationary trend as it understands that more time is needed for its measures to take effect on the economy, although the Fed is aware of a slowdown in business investments and the housing sector, where activity is far below its last year’s peak. Policymakers may see this as a trend but recent figures for the housing market in the U.S. demonstrate better than expected new home sales in May at 763,000, outrunning April’s 680,000 and 656,000 in March.

In his speech Powell refered to a stronger than expected economic performance and a healthy labour market in America. Indeed, the economy in the United States is seen to be booming as Q1 2023 GDP growth was upgraded to 2.0% QoQ from the first estimate of 1.3%. This might sound insane, but the economy is booming amid high inflation and borrowing costs. The reason for this is the strong labour market. Jobless claims released on June 29 went down to 1,742K from 1,761K a week before. The economy is generating new jobs well above forecasts at high levels and average wages are also rising at high rates. This rise is almost the same as the PCE numbers. Thus, Americans may allow themselves to maintain elevated consumer activity amid inflationary pressure.

So, the Fed has almost no choice but to resume rate hikes at its July meeting. Almost 82% of investors agree with this scenario, and the number is rising according to CME FedWatch tool. Although investors do not believe the Fed could allow one more rate hike this year, the number of optimists who bet there will be no rate cuts this year is prevailing and is even rising.

The others from the central bank camp are following the Fed. The European Central Bank has raised its interest rates by 0.25% points to 4.00%, the Bank of England delivered a surprising 0.50% points hike to 5.00%. Norges Bank, the central bank of Norway, also unexpectedly raised its interest rates by 0.50 percentage points.

The new hawkish move by Powell makes it easier for others to increase their interest rates.

Esperio analysts believe that this sentiment is largely in favour of the U.S. Dollar that is beginning to stand up straight and moving up towards the basket of major currencies.

What is worth mentioning here is that central bankers remain the primary source of the demand for gold in the international market. Central banks have added 228 tonnes to global reserves in Q1 2023, a record high, compared to 83 tonnes in the same period last year. However, the overall demand is deteriorating. It fell by 13% YoY to 1,080.8 tonnes during January-March 2023 thanks to the decreased holding of global gold ETF’s with $1.5 billion outflows during first two month of 2023. This situation is seen to be repeating itself as outflows in Gold ETF’s resumed without any breaks in June. The Bank of America has reported a $1 billion outflow from gold ETF’s during the third week of June alone. The largest SPDR Gold Trust fund has reported five weeks of outflows during the last six weeks, with $1.21 billion worth of funds leaving the Fund during this period.

Even if the Fed does surprise investors with no rate hikes, it would eventually mean the rise of inflation and economic troubles in the U.S. and on a global scale. Thus, gold prices are poised to fall in any scenario.

These considerations and the recent Q1 GDP data for the U.S. pushed gold prices below the important resistance level of $1900 per ounce. This may push prices down to the $1840-1840 per ounce level, and in an extreme scenario, further down to $1700-1750 per ounce, although the latter is unlikely to happen.


Alex Boltyan, senior analyst of Esperio company

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