Gold Prices Are Running To Record! These Levels Are Coming!

As markets rebalance after the latest inflation report, the most likely outcome is a rate hike in May and a possible rate cut in July, according to analysts. Analysts interpret the Fed’s next move and explain its impact on gold prices.

Lots of mixed signals in inflation report

March inflation data showed that the consumer price index (CPI) increased by 0.1% on a monthly basis, following the 0.4% increase in February. On an annual basis, CPI stood at 5%, the smallest increase since May 2021. Housing costs were the main driver of inflation last month. Meanwhile, core services excluding housing, Federal Reserve Chairman Jerome Powell’s favorite measure of inflation, rose 0.4% after gaining 0.5% in February. Edward Moya, senior market analyst at OANDA, comments:

There were many mixed signals in this inflation report. The domestic food index fell for the first time since September 2020. The energy index fell 3.6% in March. Housing costs have declined somewhat, but are still high and contributing the most to inflation.

Many economists agree that the Fed will raise rates by another 25 basis points in May. “With core non-residential services inflation still not significantly easing and core goods prices recovering, the Fed is more likely to hike rates by 25 basis points at its next policy meeting,” said Paul Ashworth, chief economist at Capital Economics North America.

Although CPI falls, Fed officials remain cautious

After the inflation report was released on Wednesday, Richmond Fed Chairman Thomas Barkin noted that more work is needed to stabilize core inflation. “I’m particularly focused on core inflation, which is still just over 5% year-on-year. “We’ve had some good news on energy, but I think there’s still a lot to be done to get core inflation back to what we want,” he said.

However, there are also some differences of opinion within the Fed. On Tuesday, New York Fed President John Williams said more rate hikes are needed to keep inflation down. “We have to do whatever it takes to make sure we keep inflation down,” Williams said in an interview.

Meanwhile, Chicago Fed President Austan Goolsbee urged “vigilance and patience.” Goolsbee urged authorities to be cautious at an event organized by the Economic Club of Chicago. “We need to collect more data and be careful about raising interest rates too aggressively until we see how headwinds work to keep inflation down,” Goolsbee said.

Is the Fed likely to lower interest rates?

Bill Adams, chief economist at Comerica Bank, says May’s rate hike is most likely the last of this tightening cycle. “The Fed’s dot chart predicts holding the Fed funds target at this level until the end of this year, but a slowing economy is likely to push them down before then,” Adams comments.

However, ING chief international economist James Knightley notes that interest rates that were raised to the 5.00-5.25% range in May may mark the peak of tightening, while higher interest rates increase the likelihood of a “hard landing”. “The Fed’s dual mandate of price stability and job-maximizing provides more flexibility than most other central banks,” Knightley said. “Assuming we’re right that inflation slows rapidly in the second half of the year and the unemployment rate is starting to rise, we see the potential for the Fed to cut rates by 100bps before the end of the year.”

Agold for prices overall uptrend still intact

Edward Moya says inflation for the gold market is not slowing down fast enough to warrant a record high. “This inflation report is promising for disinflationary trends, but it doesn’t mean the Fed’s tightening job is done,” Moya said in a statement. From this point of view, the analyst interprets the effect on gold prices as follows:

The overall uptrend for gold prices is still intact. But prices are likely to remain in consolidation mode until there is some clarity on economic growth and the Fed’s action plan for this spring and summer.

This could be the catalyst needed for gold prices

According to TD Securities commodity strategist Ryan McKay, if the market concludes that May’s hike will be followed by rate cuts, gold will rise. McKay explains his views as follows:

This could be the catalyst needed to see gold push highs again. However, CTAs could fuel the fire with the next upside trigger at $2,064.

Commerzbank expects a drop in gold prices

The biggest caveat for gold is that the Fed is more hawkish than expected, which is pushing prices down. Commerzbank is pricing in another 50 basis points interest rate hike this year and no rate cuts. Commerzbank analyst Thu Lan Nguyen has this to say about his prospects:

This will mean a further increase in interest rate expectations and hence another downside correction for gold prices. We expect the gold price to drop to around $1,900 by mid-year.

Gold prices could lose $2,000

Metals Focus chief executive Philip Newman says gold could lose $2,000 if the Fed doesn’t make a clear turn. Newman is skeptical that gold will remain at this level for a while. He bases his opinion on the following points:

The Fed did not say it was ready to begin a rate cut. There is currently a mismatch between market expectations and what the Fed is actually saying. As we enter the second half of the year, the market will move more towards the Fed’s position.

It is possible for gold to drop to $1,700 levels

Once the selling begins, the price floor of gold may drop as low as $1,700. However, Newman adds that if gold can hold above $1,900 longer, it may limit sales. In this context, he makes the following statement:

This may mean that the price of gold will fall less. However, we still think that the price will weaken significantly. Can you see it drop to $1,700? This is possible.

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