Monthly gold update

Gold: Spotlight on January’s performance
Gold continued its strong run since September last year with another 5.7% added in January, ending the month at $1,928. Gold is benefitting from sentiment that the Fed is encroaching on its peak rate for this cycle and the implication this could have for real yields and USD strength.
Source: Bloomberg, as of 31 January 2023. Past performance does not predict future returns.
Gold ended January at its highest month-end level since March of last year although intra-month the metal hit a high of $1,948. The monthly return of 5.7% means the metal has seen an increase in price of 18.4% for the three months to the end of January. January is typically a strong month for gold, adding 2.0% on average over the past 25 years. This January’s even stronger performance is primarily due to this cycle’s peak rate in the US being brought forward in market pricing and greater market confidence that the Fed will cut its policy rate into this year-end to below 5% (the Fed is currently signalling its Fund Rate will be above 5% come the end of 2023).
An additional boost to the gold price was that Chinese Lunar New year fell in January this year, which should provide a boost to jewellery demand; China is typically the largest purchaser of gold jewellery globally although 2022 was an anomaly (due to China’s pandemic response) with India the largest market. A weaker dollar should act as a catalyst to encourage Chinese purchases, too. Latest data also highlights exceptional central bank demand, which could further extend prices. What there hasn’t been is the inflow into gold ETFs that would have been expected given gold’s momentum.
As the topic of the US debt ceiling has resurfaced again, it’s worth pointing out that this could be advantageous to gold should policy uncertainty increase. This is an issue to potentially play out over the next few months.
Keep an eye on … ETF flows.
Source: Bloomberg, as of 31 January 2023. Past performance does not predict future returns.
January was a pattern of falling real yields, ending the month at 1.25%. Inflation data is softening from high levels but it’s the direction that is acting as a catalyst to the market’s rates pricing; markets are moving past the inflation data and focusing on the path of economic growth from here. There has been mixed data on the economic activity front, but survey data is still pointing to contractionary conditions, although the Fed’s focus is on the labour market specifically.
The Fed has highlighted its greater reliance on the quarterly employment cost index as it continues to lean into the problematic labour market to forecast higher rates. The most recent reading showed a 1.0% quarter-on-quarter increase in employment costs, lower than both previous and expectations but still significantly higher than the pre-pandemic run rate. Employment costs include benefits in addition to wages but, in the interim, it’s likely monthly wage data will act as a relevant guide and provide some insight to the Fed’s next move.
Keep an eye on … wage data.
Source: Bloomberg, as of 31 January 2023. Past performance does not predict future returns.
Continued weakness in the USD saw the DXY index retrace to levels of May of last year. For January itself, the index lost 1.4% and has therefore lost 10.5% since its recent high of 114.1 in September 2022. The dollar has weakened since the last Fed meeting when markets repriced the next rate hike as 25 basis points (bps) from 50 bps, and this stance gained traction over the course of January. This change has widened interest-rate differentials, causing the weakness in the dollar. Dollar weakness has been the key driver for gold’s recent positive performance.
When gold was at similar levels in April of last year, the Fed had a relative advantage of a further 75 bps of interest rate hikes priced in over the Bank of England and 50 bps above the ECB to the end of the forecast range. Looking to the end of current forecasts, the Bank of England has an additional 75 bps of hikes priced in over the Fed and the ECB has 1.5% of hikes priced in above the Fed. Although there is clear dollar weakness implied a quantitative implication for gold is clouded by the fact in April of last year gold was coming off its highs caused by the invasion of Ukraine. The key market theme now is the Fed is seeing higher year-end rates than the markets and, therefore, expected dollar weakness would be tempered if the Fed view prevails.
Keep an eye on … convergence between the market and Fed on year-end Fed Funds rate.
Investment risks
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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.