Fed Outlook and Impact on Price of Gold

What impact has recent demand had on the gold price?

Despite very strong jewelry demand out of China and India and a Q3 2022 quarterly record of 400 tons of gold purchased by central banks around the world, the gold price was under pressure during the due to weak Investment demand. Persistent outflows from the gold bullion ETFs in the third quarter more than reversed all the gains from earlier in the year. Bar and coin demand was strong but not enough to offset the ETF outflows.

Investors are tasked with deciding whether to hold gold to protect their portfolios from high inflation and geopolitical tensions or to reduce their holdings as global interest rates rise. In an environment of rising rates and the outlook for inflation to come down as a result of the monetary tightening programs by the [U.S. Federal Reserve] Fed and other central banks, investors have chosen the safety of the U.S. dollar, propelling it to 20-year highs which has been the biggest headwind for gold in 2022.

What is your near-term outlook for the Fed and its impact on the gold price?

Gold has a historically strong correlation with negative real rates (which are inflation adjusted rates). If inflation remains at or near the current levels, real rates are likely to stay in negative territory and we would expect this to be positive for gold. We expect gold to continue to consolidate around the $1,650-$1,750 level in the near term. A pause of the Fed’s tightening program would likely be a strong catalyst for gold. However, gold may rally even ahead of a Fed pause or pivot, as the market anticipates the end of the rate hikes and/or if the Fed is no longer seen as being in control of inflation.

The recent gold price action, following the last CPI Report for October here in the U.S., is a perfect example of how expectations of a Fed pivot getting priced in can be very beneficial for gold.

The gold price broke out the recent downward trend and traded up well above $1,700 per ounce, and it now looks like it may be back on the longer-term bullish trend that it has been in since 2016.

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CPI – US CPI Urban Consumers YoY NSA Index measures US consumer prices (CPI) as a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

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