Gold News

Gold Price Drops $25 from $2000 as US 'Set to Avoid' Debt Default, Fed 'Bias' to Raise Rates' to 2-Decade High

The GOLD PRICE slipped to new 2-week lows in London trade Wednesday, extending yesterday's steep drop through $2000 per Troy ounce after strong US economic data and comments from Fed policymakers saw the market consensus on interest-rate cuts start to retreat.
Democrat President Joe Biden meantime cut short a visit to Asia for talks at the White House with Republican House Speaker Kevin McCarthy over raising the US federal borrowing limit from the current $34 trillion ceiling to avoid a debt default and government shutdown, likely to start 1 June.
Trading at $1985 around 10.30am UK time today, gold bullion set its first London benchmark below $2000 since May 2nd, snapping a record run of 9 sessions above that level and heading for its cheapest afternoon fixing price since mid-April at $1975 around 3pm.
For US interest rates, "If there's going to be a bias to action, for me it would be a bias to increase a little further as opposed to cut," said non-voting Fed member Raphael Bostic, head of the Atlanta division, on Monday.
"Inflation is still high, we have to stick to what we're doing," said fellow alternate member and Cleveland Fed president Loretta Mester on Tuesday, and "smaller, less frequent steps" will help higher interest rates avoid causing financial instability, added voting member Lorie Logan, president of the Dallas Fed.
US retail sales, industrial output and housing-market activity data meantime all came in stronger than analysts had forecast yesterday, helping the Dollar to rise and knocking the gold price $20 lower inside 3 hours to $1990 as betting jumped that the Fed will in fact continue to raise its key interest rate next month.
In contrast to gold, global stock markets stabilized Wednesday, holding a little above Tuesday's 8-session low as market-priced odds suggested by the CME derivatives exchange's FedWatch tool now see a better than 1-in-4 chance that overnight rates will rise to a ceiling of 5.50% in June, the highest since New Year 2001.
Chart of US Fed Funds rate vs. Wilshire stock index. Source: St.Louis Fed
"I think at the end of the day, we do not have a debt default," McCarthy told CNBC today. "The timeline is very tight. But we're going to make sure we're in the room and get this done."
But "investor indifference to the threat of a prolonged debt-ceiling impasse has left a handful of tail-risk strategies almost too cheap to pass up," says Bloomberg, quoting Bank of America analysts now advising clients of a long gold, short equities strategy on options contracts they claim would return 30-to-1 if the talks in Washington fail to halt panic as they did when the US was downgraded from triple-A by global credit ratings agencies, sending gold to a then-record $1920 back in summer 2011.
"Gold is ripe to be the beneficiary asset class" amid a range of today's political and financial stresses, says Swiss bank UBS' Christine Gilfillan, head of precious metals sales Americas.
"It can wear many hats – whether it's for diversification, inflation, geopolitical tension or the lifeboat to the rumblings in equity markets."
Tuesday also brought data showing that China's industrial output, fixed-asset investment and retail sales growth all accelerated much less than analysts expected in April, while the UK's unemployment rate ticked up to 4.0% (but wage rises held firm) and economic sentiment across the 19-nation Eurozone sank to a negative reading for the first time since December.
While Wednesday's US data said new housebuilding starts rebounded a little in April from March's slump, the number of new building permits issued continued to fall.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals