Gold prices surpassed $1,900 on Friday as inflation fell. However, whether the yellow metal will hold its gains depends on the Federal Reserve’s rate hike expectations for its February meeting. Analysts interpret the market and share their forecasts.
Evidence that the Fed should start slowing down
Gold is already up around 4%, with impressive gains at the start of the year. Since November’s low of $1,618, gold has surged around $280. 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 push gold to $1,900, traders needed to see inflation begin to drop significantly, which is exactly what happened with the December figures. cryptocoin.comAs you can follow, annual inflation in the last month of the year decreased to 6.5% after the 7.1% rate in November. Annual core CPI also slowed to 5.7% from 6%.
James Knightley, ING’s chief international economist, said: “After peaking at 9.1% yoy in the headline in June and 6.6% yoy in September, the slowdown continues. “The last three months of data point to a notable 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 began pricing in a 25bp increase in February with a 96.2% probability against a 50bp increase. Just a few weeks ago, those prospects were almost split in half. Knightley comments:
There’s enough here for the Fed to choose a 25 basis point hike in February. Still, officials will remain cautious, given the strength of the job market. It will also likely mark another 25 basis points increase in March.
Gold price soars at 25bps thought, but…
But Wells Fargo economists Sarah House and Michael Pugliese say it may be too early for the Fed to declare victory over inflation. In this context, they make the following statement:
Increasingly convincing evidence of slowing inflation brought by the report increases the chances of the FOMC increasing the fed funds rate by just 25 basis points at its 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 figures are significant. 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. So if 50bps expectations rise, maybe he 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 recession 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 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 breaking the $1,800 level. Gundlach believes this is a pretty good time to buy and own gold.
“Gold prices reacted to this situation by rising”
Nicky Shiels states that gold is in the new bull trend on the idea that the markets have already seen the peak 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 offers a weaker US dollar and precious metals well. 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 U.S. dollar weakened overall, so gold responded 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 there is no more room for metal prices to move before the recent momentum of taking profits stalls, especially if a risky trade turns around.
The three most important factors that contribute to the strength of gold
“The CPI report marks the beginning of the end for high inflation,” said Jason Schenker, president of Prestige Economics. According to Schenker, inflationary pressures decreased significantly in December. Because 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 moderate.
Sprott Asset Management market strategist Paul Wong says the three most important 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 so aggressively and why,” Wong says.
“Gold prices may go north of $1,900”
“If the Fed fails to meet market expectations that U.S. interest rates are nearing their peak and a final rate cut is on the table, that 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 with short-term price pullbacks and renewed ETF exits,” UBS analyst Giovanni Staunovo explains.
Tastylive head of global macro Ilya Spivak says gold could go north of the $1,900 level as data shows inflation to be softer. However, he says it will be interesting to see if gold can see interest beyond that.
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