We’ve Had A Bullish Year for Gold So Far!
Gold extends its recent gains, climbing above $1,875. Will it cross $1,900?
Gold continues its good start to the year! As the chart below shows, the London P.M. Gold Fix jumped to above $1,875 on January 9, approaching the key psychological level of $1,900. It means that gold has risen about 3.6% so far this year, rallying from $1,812 at the end of 2022.
What happened? Well, last week we saw a repricing of the futures on the federal funds rate. According to the CME FedWatch Tool, the chances of a 25-basis-point hike in early February went from 67.7% at the end of December to 77,2% on January 9. It means that the market expects a more dovish Fed in the near future, which is good news for the precious metals.
Recession Is Coming, Baby!
Now, the question is why the market is sensing a more cautious Fed, especially since the recent nonfarm payrolls were quite hawkish. The answer seems to lie in the recent ISM report. The ISM service-sector index declined from 56.5% in November to 49.6% in December, much below expectations. As numbers under 50% are a sign that the economy is contracting, the latest reading offers another signal that the U.S. economy is softening, or even falling into recession. To make matter worse, the manufacturing sector also contracted in December for the second consecutive month. It declined from 49% to 48.4%, the lowest figure since May 2020.
Implications for Gold
What does it all imply for the gold (and silver) market in 2023? Well, the repricing of the futures on the federal funds is fundamentally positive for the gold prices. The bets on slower hikes in the interest rates sent the bond yields and the US dollar down. As gold has a strong negative correlation with them, the weakening of the greenback boosted the price of the yellow metal.
However, investors should remember that there are always ups and downs in the marketplace. Corrections may happen – after all, the recent rally was quite quick, and market expectations can change very fast.
Having this caveat in mind, I remain generally bullish on gold this year. The economic slowdown and the end of the Fed’s tightening cycle should be important tailwinds in the gold market.
Are you also bullish?
Arkadiusz Sieron, PhD