LAWRIE WILLIAMS: Gold hits $1,800 again but still looking for direction ahead of FOMC and CPI
The gold price yet again breached the $1,800 level in European trade today, but was struggling to hold on to this level ahead of the U.S. open. It seemed to then be looking for direction and running into some strongish esistance and fell back into the high $1,990’s once New York opened, but soon rebounded back again well past the $1,800 mark. Silver also, did manage to hold fairly comfortably above the $23 level.
Equities and cryptos had also been trading stronger on expectations that forthcoming inflation data would confirm that inflation may well have peaked and was beginning to come down and that the U.S. Federal Reserve would start to reign in its aggressive interest rate policy at next week’s FOMC meeting – a move which was likely to set the scene for other central banks around the world. In our view a somewhat misguided viewpoint from the investment angle as that scenario also points to imminent recession for those nations not already there, but both equities and bitcoin did begin to stutter in early U.S. trade, not helped by some less positive inflation data either.
The effects on equities going forwards could well be decidedly negative – a view shared by billionaire investor Ray Dalio, founder of Bridgewater Associates, who has predicted a potential equity decline of up to 20% - and perhaps even more in the tech sector. We also think cryptos too could suffer in such a loss of investor confidence as, in our view, their pricing is largely built on hype rather than substance.
The U.S. Producer Price Index (PPI) announced today disappointed, coming in a little higher than expected showing an inflation rise of 7.4% indicating that this is still a continuing problem and could contribute towards the Fed again rethinking its interest rate raising strategy depending on next week’s CPI figure. Stripping out what are considered the more volatile food and energy costs, core U.S. producer prices rose 0.4%, up from last month's unchanged reading. Economists had been looking for only a 0.2% increase.
The U.S. Fed had been previously widely been expected to impose a 50 basis point rate increase at the FOMC meeting, unless there is a shock in the Consumer Price Index (CPI) data release due to be announced on the same date as the first day of the meeting. This Fed rate rise, if implemented, would be slightly lower than the 75 basis point increases imposed at the previous four such meetings, and its prospect seems to be being seen in a positive light by the markets. Even so, such a rate rise would bring the year-end Federal Funds interest rate to 4.25-4.5% - a level which many consider deflationary and likely to be a major factor in driving the U.S. economy into recession, that is assuming it is not already in one. Further Fed interest rate increases in 2023 are widely expected to raise the Federal Funds rate even higher to 5% or more which would almost certainly adversely impact the labour market and deepen the recessionary impact. The predicted ‘soft landing’ from the current economic malaise looks ever further away.
The World Gold Council, in its Gold Outlook 2023 report just issued suggests that gold tends to perform well in a recession – certainly better than most other assets – and also has a strong track record of its price advancing positively in the period following peaks in the dollar index. The latter looks as if it may well have peaked a week or so ago, and if so that is yet another positive for the yellow metal going forward into next year.