The price of gold soars at the start of the year

Gold has seen its price rise on all but one day since the beginning of the year. So far, it has hit a nine-month high of $1,883 per ounce. Markets are clinging to the hope that they will have weathered most interest rate hikes for this cycle. Higher interest rates increase the attractiveness of paper assets and make non-performing assets such as precious metals less attractive. San Francisco Fed President Mary Daly said Monday that a half- or quarter-percent increase is possible at the Fed’s next meeting on 1 February. Her counterpart in Atlanta, Raphael Bostic, said only that more caution was needed in calibrating rates, and that they could remain relatively high next year. For now, markets seem to be hoping that any upcoming recession will be historically mild. In any case, the World Bank yesterday revised its growth forecasts for 2023 downwards (+1.7% compared to +3% last June) For following year, it expects a moderate recovery with growth of 2.7%.

Gold has also benefited from the weakness of the dollar, which has also retreated against the euro and the Swiss franc. Financial markets have been regularly lowering their expectations for US interest rate hikes, which is driving US bond yields down and the greenback with them. While several Fed members continue to talk about a final rate above 5% and no rate cuts in 2023, financial markets are expecting a maximum rate of 4.75% to 5% with a possible 25–basis point cut at the Fed’s November and December meetings. While the US dollar remains under pressure as rate expectations drop, the euro continues to be supported by the ECB’s insistence that rates will have to rise to alleviate current price pressures. Isabel Schnabel, an influential member of the ECB’s Governing Council, recently stated that the ECB remains in a rate hike cycle and that rates still need to rise ‘significantly’. This means the Fed should get to the end of its rate hike cycle before the ECB. Therefore, current interest rate differentials between the dollar and the euro favour the latter. In addition, good economic figures have also helped the single currency to make progress. Unemployment remained stable at 6.5% in November and inflation continued to fall in December for the second consecutive month, dropping below 10% to 9.2%, down from 10.1% in November. A lull in energy prices is the main reason. Finally, according to the ECB’s forecasts, wage growth in the coming quarters should be very strong compared to historical references in order to catch up with inflation. Gross wages in the euro area are expected to have risen by 4.5% in 2022 and are forecast to grow by 5.2% this year. In Germany, trade unions are beginning to call for wage increases of between 10% and 15%.

The world’s two largest economies, the US and China, are expected to release inflation figures later this week. The US figure is, of course, the most important and closely followed indicator. The yuan is traded within a limit set by the PBOC, which limits the impact that the data can have. Nevertheless, China is the manufacturing centre of the planet. If production costs rise for Chinese companies, they will eventually spill over into the supply chain in the rest of the world. China’s inflation is expected to accelerate to 1.8%, up from 1.6%. This is still below the PBOC’s 2% target, which means that the government could continue to stimulate the domestic economy. Meanwhile, on the other side of the Pacific, the US CPI is expected to continue its deceleration, slowing to 6.5% from 7.1% year-on-year in November. Economists’ forecasts show that they expect inflation to trend downwards. Core inflation is also expected to fall, but not as fast: it has been forecast at 5.7%, compared to 6.0% the previous month. One should note, however, that this is still almost three times the Fed’s target rate.

The world’s two largest economies, the US and China, are expected to release inflation figures later this week. The US figure is, of course, the most important and closely followed indicator. The yuan is traded within a limit set by the PBOC, which limits the impact that the data can have. Neverthe-less, China is the manufacturing centre of the planet. If production costs rise for Chinese compa-nies, they will eventually spill over into the supply chain in the rest of the world. China’s inflation is expected to accelerate to 1.8%, up from 1.6%. This is still below the PBOC’s 2% target, which means that the government could continue to stimulate the domestic economy. Meanwhile, on the other side of the Pacific, the US CPI is expected to continue its deceleration, slowing to 6.5% from 7.1% year-on-year in November. Economists’ forecasts show that they expect inflation to trend down-wards. Core inflation is also expected to fall, but not as fast: it has been forecast at 5.7%, compared to 6.0% the previous month. One should note, however, that this is still almost three times the Fed’s target rate.