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(Kitco News) – After a month of massive volatility, markets are now comfortable with the idea that the Federal Reserve isn’t done raising interest rates. Not only is a 25 basis point hike for May firmly priced in, but markets have now pushed back the timing of any potential rate cut to year-end.
At the height of last month’s banking crisis, markets were pricing in a possible rate cut as early as June, so it’s no wonder the price of gold is ending below $2,000 an ounce this week. While gold could see new near-term lows, analysts note that the market is still on track to hit all-time highs this year.
It’s no surprise that some investors are taking profits on gold. The fear of the collapse of the world economy is replaced by new fears of inflation. While consumer prices in the United States are on a downward trend, inflation is making itself felt strongly in the United Kingdom. The country’s consumer price index showed relatively stable annual inflation at 10.1 percent last month. This is the seventh month in a row that inflation has exceeded 10%.
There are unique reasons why inflation is exceptionally high in Britain. Yet the data indicates that inflation is a global problem that will likely take root throughout the global economy. UK inflation data showed food prices rose 19.2% over the past 12 months.
Despite specific economic problems, this figure does not bode well for the world. Last time I checked, everyone needs to eat.
It is difficult to say that the inflationary threat has dissipated as the prices of agricultural raw materials increase. Sugar prices are at their highest level in 11 years; meanwhile, future feeder cattle prices are at their highest level in eight years. Consumers are better prepared for more expensive barbecues this summer.
Even those who don’t eat beef are stuck. This week, analysts at Fitch Solutions released a report indicating that rice production in 2023 is expected to see its worst annual output in 20 years. According to Fitch, the world could experience a rice deficit of 8.7 million tons.
These headlines will prevent the Federal Reserve from easing monetary policies anytime soon, which as we know is negative for gold.
However, while gold may come under some selling pressure in the near term, many analysts note that the precious metal remains well supported. Last month’s banking crisis shows that the Federal Reserve can’t do much before the economy collapses.
Many analysts have noted that gold remains an attractive safe haven and hedge against inflation.
“The monetary mess we’ve seen is far from over, and right now we’re just waiting to see how it spreads,” Grant’s Interest Rate Observer analyst James Robertson said in an interview with Kitco News. . “This will continue to support gold prices.”
Beyond global monetary policies, there are other reasons to be bullish on gold, including the fact that it remains a key monetary metal. The global trend towards de-dollarization is gaining momentum. In a recent report, Stephen Jen, CEO and co-CIO of Eurizon SLJ Capital, said the US dollar’s share as the world’s reserve currency fell to 47% last year from 55% in 2021. In 2020, 73% of reserves were in US dollars.
“The dollar suffered a staggering collapse in 2022 in its market share as a reserve currency, likely due to its heavy-handed use of sanctions,” Jen writes in the report.
Central banks have been flocking to gold in this environment, and analysts don’t expect this trend to end anytime soon.
Finally, although we talk a lot about gold in this newsletter, we cannot ignore what is happening in other precious metals. Silver is outperforming gold as prices hold above $25 an ounce and platinum is the best performing metal in the complex.
Both silver and platinum benefit from growing imbalances in their supply and demand fundamentals.
This week, the Silver Institute said the silver market reached a record shortfall in 2022 and it expects this trend to continue in 2023. Metals Focus, the company behind the research, noted that the deficits in 2021 and 2022 more than offset the cumulative surpluses of the past 11 years.
According to many analysts, this deficit should continue to support the rise in prices.
It’s all for this week. Have a good week-end.
Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.