What's moving gold prices so early in November?
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Market conditions have seen prices of spot gold jumping across the board in recent weeks, as investors begin to retreat on the Federal Reserve’s decision to hold off further interest rate hikes in November.
The central banks’ rate-setting group, the Federal Open Market Committee (FOMC) unanimously decided to pause further rate hikes - for now at least - citing weaker October job data, and overall cooling in the labor market.
Employers added roughly 150,000 nonfarm payrolls in October, according to data provided by the U.S. Bureau of Labor Statistics. This figure is nearly 30,000 below economists' expectations of 180,000. Unemployment rose to 3.9%; the highest since January 2022.
After months of battling surging wage growth, and a red-hot labor market, against the backdrop of sticky inflation, the Federal Reserve is starting to witness an overall downward trend in headline consumer inflation.
Despite the seemingly positive turnaround in recent months, core inflation remains above the central bank’s 2% benchmark, with most recent inflation data coming in at around 3.7%.
With interest rates staying at the current benchmark of 5.25% to 5.5%, economists currently predict that the central bank could further bump rates, again in December, or hold rates higher for longer as we enter the new year.
What’s moving gold?
For much of the year, investors have held to the sentiment that gold would remain a hedge against inflation, as central banks around the world continue to leverage inflation-busting monetary policies to tighten rates, and steadily decrease borrower demand.
However, a series of unfortunate scenarios, more than what we could’ve planned for, unfolded over the year, and during the early days of November, gold prices have started flirting with the psychological $2,000 breakout that could send investors into overdrive as we near the tail-end of the year.
For much of the year, interest rates and the Federal Reserve have dominated market headlines. This comes as no surprise, with the U.S. central bank initiating 11 consecutive hikes since early March 2022, with four hikes this year alone.
However, the most recent decision by the Fed to pause a possible interest rate hike is helping gold prices swing in a north-bound trajectory.
On Friday, November 3, spot gold prices briefly moved near $2,003.69 per ounce, hitting a session high, before retreating back down to $1,994.28 per ounce. Spot gold managed to climb roughly 0.4% within a single day following the Fed’s decision to hold off a 25 basis points increase in interest rates. U.S. gold features climbed higher by 0.3%, ending the session at $1,999.20 per ounce.
Wondering why this is important? Well, some economists and Wall Street analysts argue that rates staying where they are now, or even further rising could increase the cost opportunity of zero-yield gold bullion.
This could further decrease direct demand from investors, which would indirectly further push down prices, while headline inflation begins to fizzle out, and steadily nears the central bank’s 2% benchmark.
Weaker dollar performance
The performance of the dollar and the price of gold have a somewhat inverse relationship. This has been more prevalent in recent days, as the value of the dollar managed to sink towards its lowest level in over six weeks.
In the last trading week of October, the dollar fell by 1.4%, and following the Fed’s meeting, the dollar index reached moderation, easing 0.2% to 104.85, according to data by CNBC.
Many analysts are expecting the dollar to remain within weaker territory throughout much of November. During the same period that the dollar was shedding value, the euro gained 0.2%, leaving the currency to enter its highest performance of more than seven weeks, and moving closer to $1.075.
The devaluing dollar could leave investors seeking alternative options, further decreasing demand for the yellow metal, and pushing prices south.
The cause and effect would leave gold prices even more volatile due to investors stocking their reserves, and seeking more alternative options as the dollar value sinks.
Speculative investors caused a sudden jump in treasury bond yield ahead of FOMC Chair Jerome Powell’s speech on Friday, November 3.
Following the event the benchmark 10-year Treasury yields managed to climb to 4.62%. After holding strong at this position, bond yield quickly retreated, and sank, nearing a five-week low.
This has brought into question again the opportunity cost of holding yield-bullion, with Treasury bonds now nearing a seemingly gray territory, and the Fed likely to end its monetary tightening cycle in the coming months.
However, many would argue that if the Fed raises rates again in December, bond yields could slightly slip, before climbing back up again. This would send gold prices rocking before finally stabilizing below the psychological $2,000 per ounce spot price.
Ultimately what we’re seeing is a scenario of too many cooks in the kitchen can ruin the broth playing out in the gold market. A lot of turbulence is expected in the coming weeks and would hold gold prices in a tight position, and an even tighter position to break out above $2,000. Hopefully, the Fed can further hold off on more interest rate hikes, allowing market conditions to stabilize, as wider macroeconomic challenges play out against the backdrop of the market.