Gold News

Gold Price Sinks But Still $50 'Over-Priced' vs. US Fed Expectations

The PRICE of GOLD fell further on Wednesday, extending yesterday's drop through what some analysts called 'key support' at $1940 as Federal Reserve chairman Jerome Powell repeated that US interest rates will rise again by year-end after strong house-building data saw betting that the Fed will instead pivot and start cutting the cost of borrowing fall towards zero.
New US housing starts yesterday came in 21.7% higher for May than April, the fastest month-on-month jump since October 2016.
The number of new US building permits issued last month also rose to defy analyst expectations of a slowdown in activity.
"It will take time for the full effects of monetary restraint to be realized, especially on inflation," Powell said in today's testimony to Congress, explaining last week's decision to 'skip' another rise at the Fed's June meeting after raising overnight Dollar borrowing costs by 5 percentage points per annum since early 2022.
"[But] nearly all [Fed] participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year."
Fixing Tuesday at the lowest since mid-March at $1930 per Troy ounce, gold bullion slid to a fresh 3-month low at $1920 in spot trade today, before regaining that $10 drop around this afternoon's London benchmarking auction.
Chart of SOFR futures price vs. gold in Dollars. Source: MKS Pamp
"All Fed cut bets in 2023 are off the table and with that the premium needs to be unwound in gold," said a note overnight from precious metals strategist Nicky Shiels at Swiss bullion refining and finance group MKS Pamp.
Shiels' chart above shows the price of 3-month futures contracts on SOFR – the Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash collateralized by US Treasury bills or bonds and therefore "a proxy for Fed hikes/cuts expectations versus gold."
Year-to-date, the daily correlation between SOFR prices and gold priced in Dollars is running at a "strong +0.60 and at the current SOFR level, the model implied gold price is $1878...a full $50 lower."
Tuesday's US house-building data meant gold's "notable floor around $1940...broke down" says Shiels, and "stacking up against support" from solid central-bank, jewelry and retail coin and gold bar demand are now "persistent ETF appetite from discretionary [investment manager] accounts...[and] soft physical Chinese demand."
Together, says Shiels at MKS, this means that "while structural demand drivers are still there for [gold] as a longer-term asset class, it's been in no-man's-land for too long and [the] news cycle is simply slow, which usually implies a rerating lower in the near term."
The Euro gold price also dropped to new 3-month lows Wednesday, trading as low as €1759 after European Central Bank executive member and economics professor Isabel Schnabel said the 19-nation currency union's labor market remains "incredibly strong", meaning the ECB must act to prevent a "wage-price spiral" driving inflation higher again.
"Aggregate demand may be slowing by less than currently anticipated," Schnabel already said in a speech Monday, "implying that fiscal and monetary policy are not sufficiently restrictive."
The UK gold price in Pounds per ounce meantime hit its lowest since end-February at £1510 ahead of tomorrow's Bank of England decision, now expected to bring a half-point hike to Sterling interest rates after consumer-price inflation in the world's 5th largest economy failed to slow on May's data, with the 'core' cost of living accelerating to a 7.1% annual rise, the fastest pace in 4 decades.
Silver prices today fell harder than gold yet again, following Tuesday's $1 plunge with a drop to new 3-month low at $22.50 per Troy ounce.

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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