Gold News

Gold Drops 3% in Q2 as Markets 'Digest' Higher Fed Rates for Longer

The GOLD PRICE rallied from 16-week lows against the Dollar on Friday, trading at $1913 per Troy ounce after new US data said inflation in the world's largest economy slowed in May, denting the need for further steep interest-rate hikes from the Federal Reserve.
But with expectations for Fed rates at end the of 2023 still reaching the highest since mid-March however, the Dollar gold price today showed a 2.6% drop for the month of June and a 3.4% drop from end-March's record-high quarterly finish.
First-quarter US economic growth was revised higher on Thursday, while claims for jobless benefits showed a sharp drop for mid-June, spurring yesterday's brief dip below $1900 gold.
Today's headline rate of inflation on the Personal Consumption Expenditures index showed a steep drop from 4.3% to 3.8% per year in May, the slowest annual rise for more than 2 years.
Excluding fuel and food, today's PCE index said 'core' US inflation on the Federal Reserve's preferred measure also slowed last month, edging down to 4.6% per year -- just below consensus forecasts and matching the pace shown in March and December at the slowest since October 2021.
"A range of indicators from the US suggests that a recession is most likely to be avoided," Reuters quotes Harshal Barot of specialist bullion-market analysts Metals Focus.
"[But] the [Fed's] narrative is now getting digested by the market, where your economy [is] still doing well, which justifies higher rates for longer" to pull inflation down to the US central bank's core PCE target of 2.0%.
Market forecasts for where the Fed's key interest rate will sit at year-end ticked down to 5.43%, just 0.02 points below yesterday's new post-SVB high.
Today's rally in spot bullion capped gold's week-on-week price decline at less than 1.0% in US Dollar terms, but put it on track for the lowest Friday finish since 10 March, eve of the Silicon Valley Bank crash and bail-out.
Chart of end-2023 Fed rate consensus forecast vs. Dollar gold price. Source: BullionVault
Euro gold prices also rose today but dropped for the week to the lowest Friday finish since before the mini banking crisis hit the headlines, down 2.1% for the week at €1753.
The UK gold price in Pounds per ounce meantime dropped 0.9% for the week to £1506 – its lowest Friday finish since the end of December.
World No.5 economy the UK saw business investment expand more quickly in Q1 then first estimated, the ONS said meantime, while average house prices ticked higher in June according to the Nationwide mortgage lender, holding the annual pace of decline at 3.5% per year.
Germany's unemployment rate ticked higher to 5.7% last month, official data agency Destatis said, but retail sales rose more than analysts had expected, as did consumer spending in France – now wracked by a 3rd night of rioting and violent protests following the police shooting of a teenager.
Core inflation across the 19-nation Eurozone rose less than expected in June, today's 1st estimate from Eurostat said, rising only to 5.4% while headline inflation slowed 0.6 percentage points to 5.5% on the currency union's 'harmonized' measure.
Separate figures had earlier said that China's giant manufacturing sector contracted for a 3rd month running in June on the state data agency's PMI index, while services-sector activity across the world's 2nd largest economy expanded at the slowest pace so far this year.
Ending 2022 with a new record-high annual average of $1800 per Troy ounce, the gold price then marked the start of the Year of Tiger in China – the precious metal's No.1 consumer market – at a Lunar New Year record high in Yuan terms.
Making a series of fresh Euro and UK Pound record highs, the gold price in Dollars finished March with a new monthly and quarter-end record of $1980 despite the Fed raising rates yet again amid the US regional banking scare, before spiking in spot trade to a new all-time high of $2080 in early May after the Fed 'skipped' another rise, saying it would now go 'data dependent' in future decisions.
"The Fed's war against inflation isn't breaking anything significant in the economy," says a note from strategist Nicky Shiels at Swiss bullion refining and finance group MKS Pamp.
Looking at the futures market for overnight secured lending rates against gold price, "Gold has been trading at a $50 premium to where Fed expectations are indicating," Shiels says, "but [it] remains highly elastic" to the market's sentiment on what the US central bank will do next.

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.

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