Gold steadied around $1,960 an ounce on Wednesday but was still set to end the month lower, weighed down by hawkish US Federal Reserve bets and news that a tentative US debt ceiling deal was reached over the weekend. These recent developments have added further uncertainty to the economic landscape, impacting the outlook for gold and raising concerns about the potential consequences.
The strengthening US economy, supported by robust economic data, has bolstered expectations that the Federal Reserve could tighten its policy once again in June and maintain higher interest rates for a longer duration. As a result, markets have adjusted their expectations, now pricing in a higher chance of a 25 basis point rate hike next month, contrary to the previous anticipation of a pause in the tightening cycle. This shift in sentiment has had a downward pressure on gold prices.
Furthermore, the agreement between President Joe Biden and House Speaker Kevin McCarthy to raise the US debt ceiling has had an adverse impact on the safe-haven demand for bullion. The resolution of this critical issue has alleviated concerns about a potential default, leading investors to divert their attention away from gold and toward other assets.
In addition to these factors, weaker-than-expected manufacturing and services activity data in China have further fueled fears of a slowdown in economic growth, especially in the world’s largest gold consumer. The implications of a potential economic slowdown in China have ripple effects on various sectors, including gold, as it represents a significant market for precious metals.
Amidst these developments, gold has managed to stabilize around the $1,960 level, but the overall sentiment remains cautious. Investors are closely monitoring the upcoming actions of the Federal Reserve, as any indication of a more dovish stance or a halt in rate hikes could potentially provide support for gold prices.
The month-end performance of gold reflects the intricate balance between economic factors, central bank policies, and geopolitical events. The next few weeks will be crucial in determining the trajectory of gold prices and whether the metal can regain its bullish momentum. As always, investors should stay informed, closely follow market trends, and assess the potential risks and opportunities associated with gold investments.
In addition, Bloomberg Intelligence has warned in its June metals outlook that the Federal Reserve’s continued focus on tightening monetary policy, despite falling commodity prices, could indicate the potential for a severe economic reset. Mike McGlone, the senior macro strategist at Bloomberg Intelligence, expressed concerns about the Federal Reserve and other central banks remaining committed to tightening measures despite collapsing commodities, producer prices, and bank deposits. He suggested that these factors could contribute to a significant economic reset.
McGlone highlighted the importance of monitoring gold as these developments unfold and emphasized that the recent selloff below $2,000 an ounce does not signify the end of the bullish trend. He drew parallels between the current state of gold and the period leading up to the breach of the $1,000-an-ounce resistance in 2008-09. McGlone stated that gold, constrained by the $2,000 level, appears to be a caged bull awaiting a catalyst, with a potential Federal Reserve pivot being a top candidate.
Furthermore, McGlone pointed out that the Producer Price Index has not fallen at such a rapid pace since 1948. He described it as a significant metric among others, such as plunging money supply and commercial bank deposits. Gold has been the best-performing major constituent in the Bloomberg Commodity Index on a year-over-year basis until May 25, and the continuation of this trend may make sense in the current environment, although the duration remains uncertain.
Recent market expectations have shifted towards a rate hike at the June 13-14 monetary policy meeting. The CME FedWatch Tool now indicates a 65% chance of another 25-basis-point hike next month. According to McGlone, gold will not rally to see the $2,000 level acting as support until the Federal fund’s futures start indicating lower rates.
A sign to watch for a potential Federal Reserve pivot will be a weakness in the stock market. Until this happens, gold will face stiff competition from other assets, including stocks and Bitcoin. McGlone stated that if U.S. equity prices continue to rise, gold, often referred to as a “boomer rock” by crypto enthusiasts, will face increasing competition from risk assets and Bitcoin. McGlone’s bias leans towards a severe deflationary recession.
The World Gold Council’s 2023 Central Bank Gold Reserves Survey revealed that central banks remain keen on boosting their gold reserves. The survey, which polled 59 central banks between February 7 and April 7, indicated that 24% of respondents plan to buy more precious metals in the next 12 months. Financial market concerns, planned purchases of domestic gold production, and portfolio rebalancing were identified as driving factors for the additional buying.
The survey also highlighted the reasons central banks view gold favorably, including its historical position, performance during times of crisis, store of value, inflation hedge properties, and ongoing geopolitical and systemic financial risks. However, there is a growing divide between emerging markets and developing economies (EMDE) and advanced economies regarding gold allocation. EMDE respondents were more optimistic about gold’s future share in global reserves and expressed more pessimism about the U.S. dollar’s share of global reserves. This divergence can be attributed to different economic and strategic circumstances faced by both groups.
Overall, the survey showed that 71% of respondents expect global central bank gold holdings to rise in the next twelve months, with a notable shift in EMDE respondents’ perspectives. Additionally, all EMDE central banks expressed interest in establishing a domestic gold purchase program. The Bank of England remained the most popular storage location, with 53% of respondents storing gold there.
During the first quarter of this year, central banks added 228 tonnes to their global gold reserves, marking a record pace for the first three months since data collection began in 2000, according to the World Gold Council. This significant increase in gold purchases by central banks aligns with the ongoing trend of viewing gold as a safe haven asset during economic distress and amid the de-dollarization movement.
