Macro: Sandcastle economics
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Gold hits record high despite the Fed's attempted hawkish pause signal
Ole Hansen
Head of Commodity Strategy
Summary: Gold has reached a fresh record high today with the latest move being fueled by Powell’s pause and not least continued worries that more US regional banks could be in trouble with more bailouts to follow. While the market awaits data or developments that support or alter the current rate trajectory, the short-term path for gold is likely to remain choppy, especially if inflation concerns return to challenge the mentioned rate cut expectations.
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Gold prices, both futures and spot, reached record highs today around the Asian opening before running into profit taking. The move was an extension of yesterday’s rally which was fueled by Powell’s pause and not least continued worries that more US regional banks could be in trouble with more bailouts to follow. The message from the FOMC was not particularly gold bullish with Fed chair Powell dismissing the likelihood of rate cuts this year. A message that nevertheless fell on death ears with traders pricing in an 80-bps rate cut this year and 180 bps by June next year.
While the market awaits data or developments that support or alter the current rate trajectory, the short-term path for gold is likely to remain choppy, especially if inflation concerns return to challenge the mentioned rate cut expectations.
A hawkish pause interpreted differently by the market
The Fed raised rates by 25bps to a range between 5-5.25%, as was widely expected, and opened the door to a potential rate pause for now but adjusted the language to avoid any sign of pre-committing to a course of action. The prior language from its statement - “the Committee anticipates that some additional policy firming may be appropriate” was replaced with this: “the extent to which more firming is needed will depend on economic data.” While Chair Powell hinted at the risk of a mild recession, he also reaffirmed that inflation is still well above its goal and there is a long way to go to bring it down. Overall, the message was seen as an attempt to dissuade traders from pricing in cuts before the FOMC feels comfortable inflation has been defeated. That message was ignored as per the mentioned movements in Secured Overnight Financing Rate futures (SOFR).
While the short-term outlook points to continued volatility, especially if incoming data fail to support the current rate cut trajectory, we maintain an overall bullish outlook for investment metals, driven among others by the following developments and expectations:
The current banking crisis is at risk of becoming "systemic" driven by inadequate risk management, lack of transparency, excessive leverage and reliance on short-term funding.
Continued dollar weakness as yield differentials continue to narrow.
Peak Fed rates, when confirmed, have historically on the three previous occasions during the past 20 years supported strong gains in gold in the months and quarters that followed
Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation.
We believe inflation is going to be much stickier with market expectations for a drop back to 2.5% perhaps being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.
A multipolar world raising the geopolitical temperature
Low investor participation adding support should the above-mentioned drivers eventually provide the expected breakout.
Gold continues to trade within a 200-dollar wide upward trending channel that started back in November, once the triple bottom was confirmed by the move above $1730. Following the strong March to April runup, triggered by a drop in short-term interest rates and yields in response to the banking crisis, gold went through a period of consolidation before the latest runup to a fresh record high. Key support remains in the $2k area ahead of trendline support, currently at $1982, while the next level of major resistance is not until the $2100 area.
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