Gold Price Outlook

“Gold prices continued their march higher in January, touching an intraday high of $1,975.50 on 2 February. This was the highest level that gold prices had reached since April 2022, following Russia’s invasion of Ukraine.

Gold prices settled at $1,876.60 on 3 February, giving back roughly two thirds of the gain in gold prices since the end of 2022. The sharp decline in gold prices was the result of a stronger than expected U.S. jobs report, which served as a reminder to the market that inflation could still turn problematic, even though it is presently showing signs of cooling, and that the Fed may in fact stick to its projection of not cutting rates later this year, a factor the market has been dismissing on expectations of a recession.

Even though gold prices declined sharply in response to the U.S. jobs report, gold prices still are quite high by historical standards. Gold prices have been consolidating, with an upward bias, following the sharp decline seen on 3 February. Investors still see several reasons to own gold ranging from the U.S. debt ceiling talks to the prospect of a recession later this year, the deterioration of China-U.S. relations to a potential intensification of the RussiaUkraine war. Cooling inflation is expected to raise hopes that there would be less of a reason to further tighten monetary policy or keep it tight for longer. This expectation should help support gold prices.

One ongoing risk to the price of gold and several other assets is the divergence between the Fed and the market’s expectation of when the Fed will cut back rates. The Fed has so far been consistent in saying that it does not plan to reduce rates this year while the markets, based on the CME Group’s FedWatch tool, see the Fed scaling back rates by 25 basis points (bps) at the December meeting. At the next Federal Open Market Committee meeting in late March, when the Fed releases its fresh projections material, there should be more clarity on what the Fed will do through 2023. If the Fed continues to project no reduction in interest rates this year it could weigh on various asset values, including gold.

It should be noted that the market has reined in how much it expects the Fed to loosen policy following the last U.S. jobs number. Not only is the market pricing in an additional 25 bps in interest rate hikes probably in March, which was not the case before the jobs report, but the market also has scaled back the timing as well as the magnitude of interest rate cuts at the end of 2023.

The recent strength in gold prices also is having a negative impact on price sensitive portions of the gold market like fabrication demand and coin demand. Local gold prices in India have moved to a discount to the London fix, while Chinese premia have been declining in recent weeks and could soften further now that the Lunar New Year is behind the market.

Central banks also tend to display price sensitivity and the recent surge in gold prices could disincentivize some of these banks from adding to their holdings, similar to what was observed during the first quarter of 2022. A pullback in demand from these sectors is unlikely to drive gold prices sharply lower, but it would make it harder for gold prices to continue on their journey higher.”