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Gold Prices Drop Yet Again as UK Hikes Rates Despite 'Slowing Inflation'

GOLD PRICES fell together with commodities, stock markets and most major governments' bond prices Thursday, hitting new 3-month lows for US Dollar and Euro investors for the 3rd trading day on the run after the Bank of England hiked UK interest rates  to the highest since the eve of the global banking crash of 2008.
With gold prices falling through $1920 and €1750 per Troy ounce, the UK gold price in Pounds per ounce dropped within £1.50 of £1500 – a record high when first reached during the summer 2020 Covid Crisis but almost 10% below last month's fresh all-time peak.
Facing the worst consumer-price inflation both in 4 decades and across today's rich-world economies, the Bank raised the UK's cost of borrowing for the 13th meeting in a row – and made a steep half-point hike for the 4th time in this now 5-point rate-raising campaign – despite repeating in its accompanying statement that the pace of price increases is either flat-lining, slowing or set to "fall significantly" in the second half of 2023.
The London stock market fell, down 1.2% on the FTSE All Share, as did shorter-term UK government debt prices.
But longer-term Gilts rose, edging both 5-year and 10-year borrowing costs below today's new overnight interest rate of 5.0% per annum at the UK central bank – an "inverted yield curve" often taken to signal an economic recession ahead.
Chart of UK yield curve, 22 June 2023. Source: WorldGovernmentBonds
"Central banks will bring to an end their tightening cycles in H2-23," says a note from French investment bank Natixis, because – in contrast to the UK's latest consumer-price data – inflation in the USA and Eurozone "is [already] slowing at long last.
"The energy crisis is now behind us...and the decline in headline and core inflation seems well and truly under way" for US and Euro consumers and businesses.
So while the European Central Bank "is set to raise its rates in July and possibly in September...[and] the Fed could jack up its rates by a further 25 basis points [or] possibly 50bp...[they] should be able to call it a day in Q3," reckons the outlook from Natixis.
"The [bullion] market still believes the US central bank is very close to finishing their rate hikes," agrees analyst Edward Meir, now at brokerage Marex and quoted today by Reuters, "and that's why gold hasn't really done all that much quotes.
"It's a little bit on the defensive, but it hasn't collapsed."
With gold setting new record highs on a monthly, quarterly and spot-market basis in all major currencies this spring, four out of 11 chief investment officers from major private banks in Europe, speaking to UK trade magazine CityWire, just called a position in gold "clearly a winner" among their asset allocation decisions of the last 12 months.
Another half-point of US rate rises make "a pretty good guess" of where the central bank is heading, said Fed chair Jerome Powell to lawmakers in testimony on monetary policy Wednesday.
Last week's decision to 'skip' an 11th rate rise running was a "close call" for Chicago Fed president Austan Goolsbee, he said yesterday, because inflation in the price of services is proving "pervasive".
On the forex market, the Pound whipped by almost 1 cent against the Dollar inside 15 minutes of today's Bank of England announcement, before trading unchanged from before the decision around $1.28 – a 14-month high when reached this time last week.
With China shut for the Dragon Boat festival, Asian stock markets meantime fell everywhere except Tokyo, with European bourses then dropping to pull the MSCI World Index down to its lowest in 7 sessions, some 1.5% below last Thursday's new 14-month high.
Today's hike " underlines how worried [UK policymakers] are about higher-than-expected inflation," says financial author and journalist Ed Conway, claiming that it "surprises markets/economists."
"[But] for once, the Committee has acted boldly and this should help return inflation to a downward path," says former BoE policymaker Andrew Sentance
After rising last week near autumn 2022's fifteen-year highs above 4.60%, the 10-year Gilt yield dropped towards 4.30% per annum immediately after the Bank's decision, the lowest in 7 trading sessions.
Silver meantime tracked gold prices lower again, setting new 3-month lows in US Dollar terms below $22.40 per Troy ounce.

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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