Gold prices surpassed $1,900 on Friday as inflation fell. However, whether the yellow metal will protect its interests depends on the Federal Reserve’s rate hike expectations for its February meeting. Analysts interpret the market and share their forecasts.
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Evidence that the Fed should start slowing down
Gold is already up around 4%, with impressive gains at the start of the year. Gold has gained around $280 since November’s low of $1,618. One of the main drivers behind the uptrend has been the macro outlook, which includes cooling inflation, a slowing economy and the pivot expected by the Fed. To get gold to $1,900, traders needed to see inflation start to drop in a meaningful way, which is exactly what happened with the December numbers. Annual inflation in the last month of the year decreased to 6.5% after the rate of 7.1% in November. Annual core CPI also slowed to 5.7% from 6%.
James Knightley, chief international economist at ING, said, “After peaking at 9.1% yoy in June and 6.6% yoy in September, the slowdown continues. “The last three months of data point to a significant drop,” he says. This is exactly proof that the Fed needs to start slowing down. According to the CME FedWatch Tool, after the CPI report, the market started pricing in a 25 basis point increase with a 96.2% probability against a 50 basis point increase in February. Just a few weeks ago, those expectations were almost split in half. Knightley comments:
There is enough here for the Fed to choose a 25 basis point hike in February. Still, authorities will remain cautious, given the strength of the job market. It will also likely mark another 25 basis points increase in March.
Gold price rises with the idea of 25 bps, but…
But Wells Fargo economists Sarah House and Michael Pugliese say it may be too soon now for the Fed to declare victory over inflation. In this context, they make the following statement:
Increasingly compelling evidence of slowing inflation brought by the report raises the odds of raising the fed funds rate by just 25 basis points at the FOMC’s next meeting. However, as the trend in inflation is still above target, we expect the FOMC to continue tightening after its next meeting, even if it downshifts.
After many inflation surprises over the past two years, some market participants may be waiting for more evidence before adjusting their positions. Nicky Shiels, metal strategist at MKS PAMP, comments:
On the one hand, falling inflation numbers are precious. But on the other hand, strength in the core services CPI is a vexing problem for the Fed. Current gold is priced close to 25 bps. Therefore, if the 50 bps expectations increase, it probably needs to test the topcoats.
Is it a good time to buy gold?
Many on Wall Street and Main Street are pricing in rate cuts later this year as the economy begins to slow. And the gold market may be predicting it. James Knightley comments:
…With inflation slowing rapidly and calm seems inevitable, we will likely witness meaningful rate cuts of up to 100 bps in the second half.
DoubleLine Capital CEO Jeffrey Gundlach says the yield curve is a ‘screaming recession’ during the ‘Fair Markets’ webcast. According to him, the Fed will have problems up to 5% and will have to cut interest rates this year. “Bond market pricing suggests the Fed will not reach 5%,” Gundlach said. “By May or June they will drop to just under 5% and then they will start cutting,” he says.
The CEO of DoubleLine Capital states that he is bullish on gold after crossing the $1,800 level. Gundlach believes it’s a pretty good time to buy and own gold.
“Gold prices reacted to this situation by rising”
Nicky Shiels states that gold is in a new bull trend on the idea that markets have already seen the top of the Fed falconry. He expresses his views as follows:
Markets will continue to look to the noise to find the Fed pivot story. The trend is offering a weaker US dollar and good for price metals. Gold prices are currently internalizing what will happen in 2023. There will be a Fed slowdown, a Fed pivot, a recession, and then finally an injection of liquidity where the money supply will rise again in 2023.
Treasury yields fell and the US dollar weakened overall, so gold reacted by rising, according to Jeff Wright, chief investment officer at Wolfpack Capital. Lower bond yields and a weakening dollar could make commodities priced in US currency more attractive to buyers than other assets. However, despite gold’s escalation, Wright believes metal prices have no more room to move before the latest momentum of taking profits stalls, especially if a risky trade returns.
The three most valuable factors contributing to gold’s strength
“The CPI report marks the beginning of the end for high inflation,” says Jason Schenker, head of Prestige Economics. Inflationary pressures eased significantly in December, according to Schenker. The downward trend in inflation rates continues on an annual basis. Schenker makes the following statement:
While both measures of consumer inflation are high, this paves the way for more Fed rate hikes, including a possible February 1 rate hike. But the level of rate hikes will likely be more restrained.
Sprott Asset Management market strategist Paul Wong says the three most valuable factors contributing to gold’s price strength so far this year are ‘buying in China’, ‘weakness in the US dollar’ and ‘declining US Treasury yields’. “No one knows which asset is buying in such an aggressive form and why,” Wong says.
“Gold prices may go north of $1,900”
“If the Fed fails to live up to market expectations on the side of US interest rates nearing their peak and a final rate cut is on the table, this may encourage gold bulls to turn their attention to $2,000,” said Han Tan, chief market analyst at Exinity.
“While the Fed is still expected to raise interest rates in the coming meetings, we see some risks associated with short-term price pullbacks and renewed ETF exits,” UBS analyst Giovanni Staunovo explains.
Tastylive global macro leader Ilya Spivak says that gold may go north of the $1,900 level as data shows that inflation is softer. However, he says it will be different to see if gold can see interest beyond that.