LAWRIE WILLIAMS: Gold and silver start the week sharply lower.
Market sentiment certainly seems to be weighing against all asset classes, as expectations that the U.S. Fed will continue on its aggressive interest rate raising programme will continue. Not even the return from the week-long holiday of the Chinese, where gold demand apparently is strong, has been able to reverse the trend in precious metals, and as I write, gold had fallen to around $1,680 in European trade and silver back to the $19.60s, although both were beginning to make something of a recovery this morning in Europe. It will be interesting to see how they fare in U.S. markets, which tend to set the global trend, when they come on stream later today.
Platinum has also been trending weaker alongside a rising dollar index, which has to bear the responsibility for most of the adverse action in commodity prices. Equities in Asia followed their U.S. counterparts downwards and were also falling in Europe and bitcoin wasn’t showing any positivity either. Altogether not a very auspicious time it seems for investors across the board. There is a general feeling of doom and gloom as markets all around the world seem to be headed for recession, inflation seems to be remaining elevated and, if anything, the war in Ukraine looks like it may be entering an escalatory phase. The sabotage of the Kerch bridge and the seemingly retaliatory action by Russia with missile attacks on civilian Ukrainian targets which have not been impacted for some time, could be upping the ante.
To an extent the Consumer Price Index release due in three days time could well move the markets sharply up, or down, but as we have stated here before it will be the apparent movement in the core inflation figure which should be the key to the Fed’s likely decision at the forthcoming FOMC meeting. The core index strips out food and energy inflation, which are largely outside Fed control, both having been heavily impacted by supply chain issues resulting from the Ukraine war.
It is the core inflation rate movement which will determine whether or not the Fed’s interest rate raising programme is having any effect. On the evidence of the recent Personal Consumption Expenditure (PCE) data reading it may well be still too soon to tell, which could well lock the Fed in to the anticipated fourth-in-a-row 75 basis point interest rate rise at the FOMC meeting. If this is the case, then markets will likely remain depressed unless a subsequent statement by Fed chair Powell suggests there may be a rapid end in sight to the Fed’s currently aggressive approach. The odds on this are currently around 50:50.
As it stands the U.S. economy looks to be heading for recession – indeed some would say it is already in one. However the jobs market so far seems to be holding up quite well which is mitigating the effects and helping provide Fed chair Powell’s ‘soft landing’. But if this starts deteriorating things could turn around rapidly and a much deeper downturn could be on the cards. If so equities and bitcoin could easily lose another 20% or more. Gold could move either way – upwards if the dollar comes under pressure as debt servicing becomes more problematical at higher interest rates, or further downwards if the greenback continues its upwards path against the Euro in particular (although the Euro gold price could well show further gains).