Stable Gold!

Market swings, rising yields but stable Gold.

First, Gold was marginally down in January, but rising nominal yields, a stronger dollar, and a more hawkish than expected Fed statement were the primary headwinds for gold during the month. Global gold ETF inflows of 46t were the highest since May 2021. It looks like that monetary policy and inflation rates will remain significant for gold in the near future. Despite rising yields and US dollar strength, gold climbed steadily amongst equity market turbulence before a monetary policy-induced price drop in the final week of the month erased those earlier gains. Therefore, Gold shows qualities as a safe-haven.

Historically seen, elevated inflation is keeping real rates at record lows, and pushing investors towards riskier and less liquid assets but gold fell sharply following the FOMC statement on 26 January, which was more hawkish than expected, confirming that interest rates will likely rise in March, and that no decisions have yet been made on the size or number of rates rises for this year.

The rise in Treasury yields was the biggest headwind during January, but breakeven inflation was also likely a significant drag on gold’s performance. The US 10-year breakeven rate fell from ~2.6% to ~2.4% in January, suggesting market expectations are for a more moderate level of inflation over the long term. US dollar strength was also a headwind for gold, as the dollar index hit its highest level since 2020. However, relative to other mainstream assets, gold’s performance in January was fairly robust.

Interest and inflation rates will remain significant for gold when looking ahead.

Gold has regained some ground in the first few days of February, returning to around the US$1,800/oz level as the initial reaction to the recent Fed statement cooled. Analysis of previous tightening cycles shows that tightening has tended not to be as aggressive as initially expected. However, the strong January US employment report, in conjunction with a hefty upward revision to December estimates, has left the door open to more aggressive tightening from the Fed in the near future.

Equally, with the Bank of England narrowly voting (5:4) to raise interest rates a further 0.25% in early February, versus a 0.5% rise, this could create further pressure for gold in local markets. Similar questions will be asked of the European Central Bank too. With a record 5.1% CPI print for January, it is facing greater pressure to respond to the threat of inflation in the eurozone. It's worth noting that not all central banks are looking to increase policy rates any time soon, most notably China. More broadly, probably investors will continue to focus on both the speed of upcoming interest rate rises and the dark cloud prospects of persistent high inflation.

Gold’s ability to move meaningfully in either direction will, in the short term, depend on whether investors are more concerned about inflation not cooling off or interest rates increasing more rapidly than expected. Similarly, gold’s short-term technical are somewhat unclear, but a healthy uptrend in the broad dollar index as well as the 10-year US Treasury yield may act as a tether.