Insight

Monthly Gold Update - April 2023

Monthly Gold Update

Gold: Spotlight on April’s performance

The gold price increased 1.1% in April, peaking above $2,040 and closing nine sessions above $2,000 before ultimately finishing the month below the psychological barrier at $1,990. Speculation of the end of the Fed’s current hiking cycle on the back of an uncertain economic outlook was the key driver this month.

Gold price during the month

Source: Bloomberg, to 30 April 2023. Past performance does not predict future returns.

Gold rallied into mid-month to $2,049 before falling away to end the month at $1,990. The metal neither quite reached its record peak ($2,075 August 2020) nor its record run of five consecutive closes above $2,000 (again August 2020). Expectations of lower yields and a weaker dollar supported the rise in the gold price ahead of more hawkish commentary from FOMC members; Fed Governor Waller noted “Inflation is far above target, so monetary policy needs to be tightened further.”1. Although there is a split in the Fed, markets increased their likelihood of another rate rise and as concerns of systemic stress in the banking system faded, alongside profit-taking, gold’s momentum reversed into month-end.

Year-to-date gold has increased 8.6%.

Keep an eye on … Fed messaging at its May meeting

Gold price and real bond yields

Source: Bloomberg, to 30 April 2023. Past performance does not predict future returns.

Real yields ended April at 1.26%, increasing from 1.15% at the start of the month. Economic data showed some moderation in activity at the start of the month as the rise in inflation and pressures in the labour market tempered somewhat. The Fed’s Beige Book struck a cautious tone noting that lending activity had stabilised from an initial pullback with the turmoil at Silicon Valley Bank as investors have been trying to establish if the economy had fully felt the lag effects from tightening.

Inflation, as measured by CPI, slowed to a greater degree than anticipated, which saw real rates rise as expectations for a 25-basis-point rate rise in May firmed. Although inflation is slowing, there are pockets of concern. The latest employment cost index was published at month-end and showed an increase of 1.2% in Q1 2023, marginally ahead of forecast but again highlighting persistency and Fed risks of prematurely ending the rate-hiking cycle. The markets are currently pricing in May as the last rate hike, taking the Fed funds rate to 5.25% then resting there before supporting the economy with a rate cut in Q4 2023.

Keep an eye on … components inflation data

Gold price and the US Dollar

Source: Bloomberg, to 30 April 2023. Past performance does not predict future returns.

The USD, as measured by the DXY index, fell 1.0% on the month as it mirrored the rise in the gold price as investors tried to determine the Fed’s path going forward and assessed the relative hawkishness of central banks. Spikes in the dollar price may have provided profit-taking opportunities as concerns are centred on a slowing US economy but also growing speculation around when the US will hit its debt ceiling, reflected in the pricing at the near-end of the curve.

The Euro represents 58% of the DXY index and month-on-month there was little change in the relative rate paths between the Fed and the ECB. With the new Governor at the Bank of Japan, markets became more optimistic that Japan would see rate tightening before the end of the year, and year-end rates in the UK were also expected higher by the end of April. Yen and Sterling are 14% and 12% of the USD basket respectively.

Keep an eye on … volatility in the near-end of the curve.

Footnotes

  • 1 Governor Christopher J.Waller at the Graybar National Training Conference, San Antonio, Texas, 14 April 2023.

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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