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Monthly gold update

Invesco monthly gold update

Gold: Spotlight on February’s performance

Gold fell 5.3% in February as a dramatic non-farm payrolls at the start of the month and stickier-than-expected inflation caused markets to re-price terminal rate forecasts. This also saw a resurgence in the dollar putting additional downward pressure on gold.

Gold price during the month

Source: Bloomberg, as of 28 February 2023. Past performance does not predict future returns.

Gold ended February at $1,827, its first month of negative return since October of last year. The metal hit a year-to-date low of $1,811 towards the end of the month but recovered slightly, so 2023’s return so far remains positive at 1.6%.

Again, this month the price moves in gold are dominated by the US interest rate cycle; by the end of the month markets had added 0.5% to the forecasts of this cycle’s peak and pushed the peak back to September 2023 from May. Forecasters are also less confident in the Fed executing a rate cut ahead of year-end meaning their expectations have converged upwards to not just meet but surpass the FOMC’s latest median forecast for year-end (5.3% per Fed Funds futures vs 5.1% on the dot plot).

In the month, the known holdings of gold by ETFs fell to the lowest level since April 2020. The lack of ETF inflows indicates a less-than-positive sentiment towards gold on a tactical basis as, despite stickier inflation, investors are preferring yielding assets.

Keep an eye on … ETF flows.

Gold price and real bond yields

Source: Bloomberg, as of 28 February 2023. Past performance does not predict future returns.

US real yields climbed over the course of the month to peak below 1.6% from 1.3% at the start of the month, a reflection of brightening US economic outlooks with more investors seeing a soft landing and even an introduction of the phrase “no landing”. The particularly strong non-farm payrolls data of 517k was more than double the expectation of 215k and caused pause for thought. The new orders data from managers’ surveys have also pointed to a stronger outlook as well as improved consumer sentiment supported by credit card spending.

Although inflation is lower, it is not falling as fast as anticipated, though wage data (an inflation signal) has been mixed. This is reflected in the US10yr breakeven, which has been trending upwards from January’s 18-month low of 2.1% to end February at 2.4%. Although some factors of inflation have been seen to moderate, there are arguments to be made that beyond excess demand in services ex-housing, aggregate inflation could remain structurally higher.

Keep an eye on … wage data.

Gold price and the US Dollar

Source: Bloomberg, as of 28 February 2023. Past performance does not predict future returns.

Pricing in additional rate hikes in the US gave the USD strength, adding 2.7% in February after making a year-to-date high in the month. The dollar made significant gains across G10 currencies as economic data wrong-footed the markets. The inverse relationship between the USD and gold strengthened again and is now at its strongest since 2005.

At the start of the month, the Fed was forecast to add another two hikes of 25 basis points to reach peak rate. The first of those hikes was executed on 1 February but a further three hikes are priced in with the peak pushed back four months to September 2023. Although the ECB also has an additional 0.5% priced into its peak rate, the Eurozone is not expected to reach that peak rate until 2024. It’s therefore (again) the relative pace of the US hikes on the interest-rate differential that is causing the USD to strengthen.

Keep an eye on … convergence between the market and Fed on year-end Fed Funds rate.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

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