Gold Prices to Keep Surging on Expected Rate-Hike Slowdown

Gold prices rose to the highest level in more than eight months as investors continue to bet that the U.S. central bank would slow the pace of interest rate hikes after the latest consumer price index (CPI) print showed that inflation cooled to 6.5% in December.

Lower interest rates mean weaker returns on interest-bearing assets, which could push investors toward zero-yield gold, which is traditionally used as a safeguard against inflation.

"We're looking at this as more of a slight pullback within our sideways-to-higher trend. We believe the combination of the weaker dollar and sticky inflation concerns continues to support our underlying positive environment," said David Meger, director of metals trading at High Ridge Futures.

Bullish Catalysts Ahead/h2

Following the latest CPI report, markets are now pricing a 90.6% chance of a 25 basis points (bps) interest rate hike at the Federal Reserve’s policy meeting in February. The markets are also expecting the rates to peak at 4.94% in June, compared to the Fed’s expectations of more than 5% going into 2024.

Meanwhile, high interest rates have reduced the appeal of non-yielding gold while driving returns on government bonds and pushing the US dollar to a 2-decade high last year. Jane Fraser, CEO of Citigroup (NYSE:C) said the Fed could loosen its monetary policy in late spring or early summer.

Elsewhere, China saw its gross domestic product (GDP) growth decline in 2022, however, the World Economic Forum (WEF) expects China’s reopening to drive global growth more than previously anticipated. Generally, Chinese investors ramp up their gold purchases ahead of the Lunar New Year holidays, which start later this week.

Carsten Menke, head of Next Generation Research at Julius Baer, said:

"The fact that the recent gold rally started to lose steam does not come unexpectedly as it was lacking the buy-in from investors. That said, a (correction) is unlikely to be massive because market consensus still calls for a less aggressive Fed going forward."

On the other hand, Menke expects to see gold prices on a softer footing amid waning investment demand. An increase in demand will play a key role in the bullion’s future trajectory, Menke added.

Gold Price Outlook for 2023/h2

Gold prices returned to trade above the $1,900 threshold on Wednesday following the U.S. dollar’s retreat from its session highs and expectations of a more dovish approach by the Fed. The yellow metal previously printed its highest levels since April 2022.

Spot prices of gold have increased around 18% since November as record-high inflation cooled down and odds for less aggressive interest rate hikes increased. A series of jumbo interest rate increases battered gold prices in 2022, pushing them down to $1,613.60 in September from a high of $2,069.89 in March.

Some analysts think that a slowdown in Fed’s interest rate could boost gold prices as high as above $2,000 an ounce in 2023, though with some turbulence. Goldman Sachs (NYSE:GS) analysts see gold prices trending around $1,950 an ounce this year.

Similarly, the steep decline in the world’s reserve currency and bond yields could “become macro tailwinds for the yellow metal, pushing gold above $2,000 an ounce in the coming months," said analysts at Bank of America (NYSE:BAC).

WisdomTree analyst Nitesh Shah said waning pressure from the greenback and bonds has encouraged investors to buy gold as a Five Minute Finance , for weekly analysis of the biggest trends in finance and technology.

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Written By: Shane Neagle