GOLD MARKET COMMENTARY – Gold firms on sentiment U.S. rate hikes may slow down as Fed makes inroads on inflation

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By David Brough

Gold was buoyed in mid-January by sentiment that the U.S. Federal Reserve could slow down the pace of interest rate rises due to signals that it was starting to win the war against inflation.

Gold was flat on January 13, down 0.04 percent to $1,919.40 per ounce, and was up more than 2.4 percent in the second week of January. Bullion faces significant nearby resistance at $1,920 per ounce, analysts say.

Several analysts believe that the U.S. Federal Reserve (Fed) could raise rates by 25 basis points (0.25 percent) at its next meeting in February, below the extent of recent hikes, after recent price data boosted sentiment that inflationary pressure may be easing.

Gold prices can benefit when rate rises soften, as bullion bears no yield. When interest rates rise aggressively, alternative yield-bearing investments can benefit relative to gold.

BullionVault issued a press release in early January saying that private investors say inflation remains their number one financial concern for 2023, and further, they predict the gold price will surge back up to its historical highs above $2,000 per ounce this year.

BullionVault added that if that 11 per cent gain carries into British pound gold prices, it would make 2023 the 4th year in five where gold delivers a double-digit rise to UK investors, meaning it could outperform other shares and bonds once again and even beat expected inflation rates.

Kitco News commentator David Erfle wrote that the Fed’s dialling down of its most proactive rate-hike cycle in over 40 years has been instrumental in keeping the price of gold elevated since November, with the resulting strong move lower in the U.S. dollar having been a major contributor to bullion’s recovery since Q4/2022.

Commenting on the support to the gold price in mid-January, Commerzbank analysts said in a note: “We believe that the (gold) market will initially take a breather until it becomes clearer whose prediction of the future course of U.S. monetary policy is more accurate – the market’s or the Fed’s.”

22-carat gold bracelet by PureJewels

22-carat gold bracelet by PureJewels

Analysts noted expectations of strong buying of physical gold by top-consumer China ahead of the Lunar New Year celebrations, which take place from January 21.

The pound has strengthened lately against the dollar, making it cheaper for UK savers to accumulate the dollar-denominated yellow metal.

The latest strengthening of sterling against the greenback was linked to the dollar falling back due to the sentiment that the Fed may slow down the pace of its rate rises.

However, the pound risks weakening against the dollar in coming months due to nagging concerns over a subdued outlook for the UK economy, analysts say.

Continuing pressure from strikes involving key workers may contribute to push wage inflation higher and drag on UK economic recovery.

(Disclaimer: this column is not intended as investment advice and any views expressed herein are solely those of the author.)