After a month of major volatility, the gold market is now accustomed to the idea that the Federal Reserve has not finished raising interest rates. Not only was a 25 basis point hike definitely priced in for May, but markets have now postponed the timing of any potential rate cuts to the end of the year.
Gold could fall even lower in the near term
cryptocoin.comAs you follow, at the height of last month’s banking crisis, markets were pricing in a possible rate cut as early as June. It is therefore not surprising that gold prices remained below $2,000 last week. While gold could fall even lower in the near term, analysts say the market is on track to hit all-time highs this year.
It’s not surprising that some investors took some profits from gold. The fear that the global economy will break is giving way to the fear of inflation again. While consumer prices are on a downward trend in the USA, inflation is felt strongly in the UK. The country’s Consumer Price Index showed annual inflation remained relatively flat at 10.1% last month. This was the seventh month in a row with inflation hovering above 10%.
This is a negative situation for gold
There are idiosyncratic reasons why inflation is extraordinarily high in the UK. Yet the data suggest that inflation is a global problem and will likely become entrenched in the broader global economy. British inflation data show that food prices have increased by 19.2% in the last 12 months.
Despite certain economic problems, this figure does not bode well for the world. Last time I checked, everyone needed to eat. It is difficult to argue that the threat of inflation has disappeared as agricultural commodity prices rise. Sugar prices are at their highest level in the last 11 years; Futures prices for beef cattle are at their highest level in eight years. Consumers better get ready for more expensive barbecues this summer.
Even those who don’t eat beef are stuck. This week, Fitch Solutions analysts released a report stating that rice production in 2023 is expected to see its worst annual output in 20 years. According to Fitch, the world may face a rice deficit of 8.7 million tons. These headlines will prevent the Federal Reserve from easing monetary policy any time soon. As we know, this is a negative situation for gold.
This situation will continue to support gold
However, while gold may see some selling pressure in the short term, many analysts note that the precious metal is well supported. The banking crisis last month shows that the Federal Reserve has a lot to do before the economy collapses. Many analysts state that gold continues to be an attractive, safe-haven and inflation hedge. James Robertson, analyst at Grant’s Interest Rate Observer, comments:
The monetary disorganization we are seeing is not over yet, and we are currently just waiting to see how it will spread. This will continue to support gold prices.
The influx of central banks will continue
Looking beyond global monetary policies, there are other reasons for bullishness on gold, including that it remains a key monetary metal. The worldwide trend of de-dollarization is gaining significant momentum. Stephen Jen, CEO and co-CIO of Eurizon SLJ Capital, said in a recent report that the share of the US dollar as the global reserve currency fell from 55% in 2021 to 47% last year. In 2020, 73% of reserves were in US dollars. In the report, Jen wrote:
The dollar suffered a dramatic collapse in market share as a reserve currency in 2022, possibly due to its harsh use of sanctions.
Central banks are flocking to gold in this environment and analysts do not expect this trend to end anytime soon.
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