Gold News

Lack of Debt Deal Sees Gold Price Drop as Fed Rate Forecasts Rise to Pre-SVB Levels

The GOLD PRICE fell back towards 7-week lows against a strong US Dollar in London trade Tuesday, dropping as Washington's latest failure to agree a debt-ceiling deal saw longer-term interest rates in the bond market rise to levels not seen since before March's mini-crisis in the US regional banking sector.
With gold priced in the Dollar dipping within $2.50 of last Thursday's low of $1952, the silver price dropped to its cheapest in 8 weeks at $23.11 per ounce before rallying 30 cents as New York trading began.
Global stock markets also retreated and US equity futures pointed lower after a non-voting member of the Federal Reserve called for 2 more rate rises in 2023 – contradicting Fed chairman Jerome Powell's more dovish comments from Friday – and PMI factory activity surveys said manufacturing across the 19-nation Eurozone is shrinking at the worse pace since the initial crash phase of 2020's Covid crisis, with regional powerhouse Germany now contracting for 11 months straight.
Yesterday's White House talks between US President Joe Biden and House Speaker Kevin McCarthy were called "productive" by both sides but no progress was made on raising the federal government's official $34 trillion borrowing cap ahead of the 'x-date' when it will run out of money – now predicted to hit in the first week of June if not on the 1st itself.
With the USA now risking a default on its debt obligations, Treasury bond prices fell yet again, driving conventional 10-year yields up to 3.75% per annum and inflation-linked yields to 1.49%, also the highest since early March, when gold prices were trading more than $100 below Tuesday lunchtime's level of $1960 per ounce.
Chart of 10-year TIPS yields vs. Dollar gold price. Source: BullionVault
Today's market forecast for year-end Fed interest rates also hit its highest since 10 March – eve of US regional bank Silicon Valley's failure – according to the CME derivatives exchange's FedWatch tool today.
Now up at 4.70% per annum, that market consensus for December's Fed rate decision still expects the US central banks to pivot and start reversing its rate hikes in the second half of 2023, but it has risen from 4.50% just one week ago, back when the gold price held above $2000 per ounce.
"The hawkish bias [in Fed policymaker comments means] June FOMC is now a live event," says strategist Nicky Shiels at Swiss bullion refiners and finance group MKS Pamp.
"That has already been priced in gold, slipping from $2000 to $1950, where it's found solid physical support. India, Middle East and Turkey are active participants, not to mention the resilient retail [investment] bid in gold and silver on dips."
The Fed's preferred measure of inflation is expected to see core PCE hold March's 4.6% annual pace on April's data, due for release Friday.
Down 0.8 points from spring 2022's four-decade peak, that's still twice the typical level on US records running back to 1960 and well above the Fed's official inflation target of 2.0% per year.
"I think we're going to have to grind higher with the policy rate," said St.Louis Fed president James Bullard – a non-voting member in 2023 – on Monday, calling for "two more moves...sooner rather than later."
But the Fed must beware signs of growth slowing said Mary Daly of the San Fran Fed, while the Atlanta Fed's Raphael Bostic – like her, an alternate FOMC member this year – called for a pause to rate rises at the June meeting while alternate member Thomas Barkin of the Richmond Fed didn't commit either way.
The UK gold price in Pounds per ounce meantime held little changed for the week so far at £1585 while Euro gold prices rallied €15 from a 3-week low beneath €1811.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium 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.

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