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Central bank rate hikes pressure gold below $1800

Commentaries & Views

Just ahead of the final FOMC meeting in 2022, Gold Futures briefly traded where they began the year above $1830 per ounce on Monday. But after the Federal Reserve increased their target interest rate by 50 basis points on Wednesday, while flagging a higher peak rate in 2023, the gold price slipped back below $1800 during the following Comex session.

Wednesday’s increase was the world’s most powerful central bank’s seventh rate hike of 2022, following four consecutive 0.75 percentage-point bumps and marking the most aggressive pace of rate hikes in more than 40 years. The increase brings the fed-funds rate target range to 4.25% to 4.50%, while the median forecast of the 19 policy-making members calls for the peak federal-funds rate in 2023 to hit 5.1%, compared with September’s forecast of 4.6%.

Collectively, Fed officials expect a less robust economy than had been previously expected for next year. And for a longer path down from decades-high inflation they insisted as being transitory at this time last year.

A 2023 recession has become the consensus view, with a 62.5% probability among economists surveyed by Bloomberg. Asked during the following press conference whether forecasts of flat growth and rising unemployment imply a recession hitting the economy next year, Fed Chairman Jerome Powell demurred. "I don't think it would qualify as a recession...because you've got positive growth," Powell said.

NBC's Brian Cheung noted in his question to Powell, the Fed's unemployment forecasts suggest some 1.6 million Americans are going to lose their jobs in the next year. Powell’s answer included a response that gave a strong indication of a coming recession.

"There will be some softening in labor market conditions," Powell said. "And I wish there were a completely painless way to restore price stability. There isn't. And this is the best we can do."

Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in a note on Wednesday, "The expected increase in the unemployment rate between this year and next has never happened without the economy falling into a recession." 

With no monetary-policy pivot in sight, “risk off” quickly came into the marketplace after two more major central banks increased rates by another 50 basis points, following the Fed in lock-step.

As expected, the Bank of England (BoE) raised interest rates by 50 basis points to 3.50% on Thursday. The central bank said that a big risk to inflation remains the labor market and could prompt more tightening. “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response,” the BoE said in its monetary policy statement.

This announcement was followed by the European Central Bank (ECB) raising interest rates by 50 basis points across the board on Thursday as well, also in line with expectations. The interest rate on the main refinancing operations, on the marginal lending facility, and the deposit facility will be increased to 2.50%, 2.75% and 2.00% respectively, the central bank said. The ECB also struck a hawkish tone signaling further rate hikes will be needed to bring inflation pressures down.

These statements were followed by several negative U.S. economic data reports issued on Thursday morning. U.S. retail sales dropped 0.6% in November, while core retail sales also fell 0.2% last month, according to the latest data from the U.S. Commerce Department.

Moreover, the U.S. economy is slowing a lot faster than expected as regional central bank data showed sharp declines in the manufacturing sector. Both the New York Federal Reserve and the Philadelphia Federal Reserve shows a further contraction in their manufacturing surveys.

Taken collectively, the risk off atmosphere in the marketplace generated by this information yesterday became too much for short-term overbought Gold Futures to remain firm, taking the price of bullion back down into its $50 trading range towards support at $1780.

If the bulls can re-group and get a close above $1800 later today in Gold Futures, then there will be prospects for a continuation towards $1850 and $1880 into year-end. On the downside, the micro trendline was broken in Thursday's bearish impulse. This leaves the downside bias below $1780, which would suggest a move towards $1740 to begin a right shoulder of a possible inverse head & shoulders bottoming pattern and on the way to creating a stronger base.

As the gold price consolidates recent outsized gains, the global economy has reached an inflection point. Tighter monetary policies amid high inflation are likely to slow economic growth in 2023. This is creating a long-term bullish gold scenario with higher interest rates, stickier inflation, and a weaker economy next year to likely cause a stagflationary recession.

Meanwhile, after a 26-month pullback was completed at the end of September, the sharp rally in mining stocks recently reached strong overhead resistance levels as well. The hawkish tone from central banks this week have gold stocks beginning to consolidate those recent outsized gains.

Gold stocks have historically come under pressure ahead of recessions, but then outperform the stock market during them. In response to the ongoing global bear market in equities, along with a growing fear of another credit market crisis and a loss of confidence in central bank policies, I expect to see movement of investment capital out of financial assets and into the precious metals sector in H1/2023.

With the physical market tightening, and coin premiums remaining extreme, a move into physical gold and silver has already begun, while gold and silver ETF inflows have lagged.

Institutional investment portfolios in totality have a small percentage of assets allocated to precious metals at less than 1%. Just a 2-3% allocation of their assets into the relatively tiny precious metals sector, would be accompanied by soaring prices for gold, silver, and mining stocks.

Once the gold price clears $2000 per ounce, which has been strong resistance for more than a decade, a speculative frenzy in junior mining stocks may already be in progress. Before this tiny sector comes back into favor, it is best to accumulate full positions in select quality juniors on weakness ahead of the coming herd of momentum trader’s and institutional investors.

With most tax-loss related selling being completed this week, lower-risk opportunities have been created in quality juniors for contrarian investors. Over the past several months, the Junior Miner Junky (JMJ) newsletter has been carefully constructing a concentrated portfolio of exceptional junior resource stocks with 3x-10x upside potential from deeply depressed levels.

If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access. This will be my last column for 2022. I wish you and your families a safe and happy holiday season and a Happy New Year.

Disclaimer: The views 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 accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.