Gold gains on softer dollar
Gold prices fell sharply last year after hitting a record high of above $2,000/oz in March as US dollar strength and central bank tightening weighed heavily on the precious metal. Higher interest rates make gold, which provides no returns, less attractive.
Investor appetite for gold also decreased in 2022. Last year was the second consecutive year of decreasing demand for gold exchange-traded funds (ETFs). Investors sold $3bn worth of physically-backed gold ETFs in 2022, a 3.4% decrease to $202.7bn of global holdings at the end of December, according to data from the World Gold Council.
But the precious metal has risen almost 20% since early November to above $1,900/oz at the beginning of 2023, helped by a weaker dollar and bets on smaller rate hikes by the Fed amid signs of cooling US inflation.
US business conditions contracted again in January as demand for goods and services fell for the fourth month in a row, the latest S&P survey showed.
The annual rate of US inflation fell for the sixth consecutive month in December to 6.5% from 7.1%, according to the latest consumer price index released earlier this month, increasing bets that the Fed may slow down the pace of its monetary tightening.
Our US economist now sees growing risks that the Fed may stop hiking after a 25bp move in February. With recessionary forces intensifying and inflation looking less threatening, the prospects of Fed rate cuts later in the year are growing. Currently, my colleague in the US expects a final 25bp rate hike in March.
Real yields have also been weakening, giving support to non-interest-bearing gold. Ten-year real US yields reached their highest levels in more than a decade last year, pushing gold from a peak of above $2,000/oz in March 2022 to a low of just above $1,600/oz in November. Given the strong negative correlation between gold prices and real yields, gold struggled in the rising yield environment. Higher yields increase the opportunity cost of holding gold, which turned investors off the precious metal. The fall in real yields since November has encouraged a more bullish view on gold and has seen the price rally above $1,900/oz.
Meanwhile, the latest CFTC data show that speculators increased their bullish bets in COMEX gold by 10,783 for a seventh consecutive week, to leave them with a net long of 93,357 lots as of the last reporting week. The net-long position was the most bullish in almost nine months.
However, ETF holders haven’t shown a shift in sentiment just yet. The gold rally still lacks support with total gold held by ETFs falling 0.2% so far this year despite rising prices.
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