November 4, 2022

Gold prices fell to levels not seen since March 2020 recently. Prices dropped following the Fed’s move to increase interest rates and Fed comments reinforcing the central bank’s commitment to fighting inflation at the expense of weakening economic growth rates. 

Prices bottomed out at a low of $1,618.30 on 3 November, but the following day were back up to around $1,675, at the time this report was being written. At one moment gold can appear weak technically, but the next moment can surge on technical signals quickly reversing.

Fundamentally there continues to be firm support for gold given all of the financial, economic, and political turmoil occurring. These factors are supportive of higher prices in the longer term, but the short-term direction of most asset prices is cuing off interest rates and market expectation that the Fed is capable of quelling some inflationary pressures through higher interest rates and continued balance sheet reductions. 

Inflation is high, but it is not leading investors to rush to buy gold and silver and drive metals prices sharply higher at this point. Instead, investors are focusing on higher interest rates than had been expected and listening to the Fed and other central banks. Markets see that the major consequence of higher inflation is and will be higher interest rates, lower economic growth, and ultimately lower inflation later. Rising interest rates already appear to be weighing on inflation in the United States.

The Fed is likely to eventually succeed in lowering inflation rates. A recession is possible, probable, at some point in the next two or three years, but probably not due to higher interest rates. A recession may be caused by fundamental supply and demand imbalances across most sectors of the economy, fiscal imbalances, and private and public debt levels, which continue to deteriorate.

Interest rates already are higher than had been expected six months ago and may stay at higher levels for longer than expected, too. This will weigh on gold prices but also suggests financial and economic problems stay longer than expected as well, which is supportive of gold prices. 

Inflation levels are likely to come down faster than many of the other financial, economic, and political problems the world is facing. Prices are expected to continue to be pushed and pulled by Fed actions and comments, but this should be expected to wane over the next few months. The Fed will continue to do its job of price stability as gold reacts to it, which has always been the case. 

__

Sources:

Prices: CME Group, Bloomberg, CPM Group

Inflation: U.S. Bureau of Labor Statistics, Bloomberg, CPM Group

Interest rates: Bloomberg