analysis
Status: 04/17/2023 07:05 a.m
Not much is missing before gold has reached its record high from the Corona year 2020. But the upward trend in the yellow precious metal is on a shaky foundation.
Gold is sniffing the mountains again, the yellow precious metal is more in demand than it has been for a long time. Since the beginning of the year alone, it has become around twelve percent more expensive. Gold thus leads the list of winners among precious metals by a wide margin. Even to the record high of $ 2075 from 2020, not much is missing. From a technical perspective, there is a lot to be said for a further rise, as the price of gold has recently formed a series of rising highs and lows. So the uptrend is intact.
Many market observers also believe that the record high may soon be tested. Robert Rethfeld from Wellenreiter-Invest emphasizes: “Speculation in gold still has room for improvement.” According to the expert, a high speculation could develop in the coming weeks. And Jürgen Molnar also sees opportunities for gold fans: the precious metal could be catapulted to new heights in the coming weeks, explains the capital market strategist at online broker RoboMarkets.
Gold and the “safe haven” image
But why is gold so popular with investors right now? Market observers like to refer to gold’s image as a “safe haven” when demand for the precious metal increases. This effect was also clearly visible at the time of the banking turbulence in March. Investors fled risky assets like stocks and into gold.
But in the past few days and weeks, such thoughts of fleeing were less in the foreground on the financial markets – this is also shown by a look at the rising share prices: For example, the DAX recently marked a new high since January 2022 and even its all-time high above 16,000 points again eye on.
US economic data depress interest rate expectations
So why is gold rising – despite investors’ reduced risk aversion? A look at the CME Group’s Fed Watch Tool provides the answer: According to this, the US Federal Reserve is nearing the end of its rate hike cycle. The market is currently only pricing in a small rate hike of 25 basis points – to then 5.0 to 5.25 percent. The first interest rate cut is therefore already expected for July. Towards the end of the year, the US key interest rate should be significantly lower again.
These interest rate hopes are being driven by the latest economic data from the United States. There had recently been signs of a cooling off in the overheated US job market. In addition, US producer prices, an important leading indicator for consumer prices, rose by just 2.7 percent year-on-year in March – and thus much more slowly than expected.
Weak dollar fuels gold demand
The discussions fueled by this about easing the restrictive monetary policy give the gold price a double boost. Firstly, gold is benefiting from the falling interest rate expectations in the USA, because this means that its major shortcoming is less important: the yellow precious metal itself does not yield any interest. If market interest rates stagnate or even fall, gold becomes more attractive.
Secondly, gold also benefits from the declining interest rate speculation in the USA via a strong foreign exchange effect, because the precious metal is traded in dollars. The prospect of a less restrictive US monetary policy is weighing on the dollar exchange rate against other currencies. However, if the dollar falls, this depresses the price of gold in the non-dollar area, which in turn increases the demand for gold.
The consequences of rising oil prices
But is the Fed really close to the end of its rate hike cycle? Or will the powerful of the OPEC+ oil cartel end up thwarting the gold bulls? Since OPEC+ announced that it would cut production from May, oil prices have risen significantly again. Energy prices are seen as a key driver of consumer prices. James Bullard, President of the St. Louis Fed, has already pointed out that part of the rise in oil prices could be reflected in inflation, making the Fed’s job more difficult.
What’s more, the markets’ speculation about rate cuts is not being covered by Fed Chair Jerome Powell either. Market analyst Konstantin Oldenburger from broker CMC Markets emphasizes that he has repeatedly stated that the final interest rate, once it has been reached, will be maintained for a long period of time.
Falling gold prices by the end of the year?
The experts at the German asset manager DWS therefore do not expect the first interest rate cuts until the second quarter of next year. “The fight against inflation is not over yet, the US Federal Reserve is likely to continue its restrictive monetary policy for some time.”
The commodity analysts at Commerzbank, Carsten Fritsch and Thu Lan Nguyen, take a similar view and are therefore skeptical about the prospects for the gold price; they expect a “renewed downward correction”. The recent price recovery is not sustainable, on the contrary, the price of gold is likely to fall back to $1,900 a troy ounce by the end of the year.
The bottom line is that there are reasonable doubts about the current hopes for a much looser monetary policy by the US Federal Reserve. The speculation that interest rates will fall over the course of the year could prove to be wrong. However, this would also break away the basis for a sustained increase in the price of gold.