US rate cut delay drives gold below $2000

Gold has stabilized following Tuesday’s slump below support-turned-resistance at $2005 after US inflation surprised to the upside, thereby raising further doubts about the timing, pace and dept of future US rate cuts. A potential delay in the timing of the first rate cut, now pushed back to the June 12 FOMC meeting, saw US bond yields spike higher with the 10-year rising to 4.33%, a 51-basis point jump in just two weeks. Meanwhile, the yield jump saw the Bloomberg dollar index reach a three-month high, supported by the prospect for other central banks like BOE, ECB and SNB acting sooner thereby lifting the greenback's relative attractiveness. 

We keep a bullish outlook for gold and silver, but as we have highlighted on several occasions in recent months, both metals are likely to remain stuck until we get a better understanding about the delivery of future US rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least rate cut expectations. 

As mentioned, the short-term rates market has gone from pricing in more than six 25 basis points US rate cuts this year to less than four, while bets on the timing of the first cut has moved out to June, potentially leaving a very narrow window available for rate cuts. This based on the assumption the FOMC are unlikely to cut rates near the November US Presidential election in order to avoid being accused of showing favoritism towards the incumbent president. 

Having broken below key support, the market is currently engaged in a battle between selling from short-term momentum strategies and continued physical demand – supporting a soft floor - from central banks and retail investors, primarily in the Middle East, India and not least China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as the weakening yuan. Ahead of the Chinese New Year holiday this week, the World Gold Council reported wholesale gold demand in China had seen its strongest January ever with 271 tons bought while the PBoC reported the 15th consecutive gold purchase in January, adding 10 tons to their gold reserves lifting the total to 2,245 tons.