By: Rhona O'Connell, Head of Market Analysis
Gold: boring price, interesting market
It’s so often the case with gold. Serene as a swan above the water, but with plenty of activity underneath. In this case, it’s less a function of activity within the gold market itself, which is relatively quiet on a day-to-day basis, but there is plethora of external forces, which over the past few weeks have added up to a zero-sum game.
The most recent game in town was the meeting of the Board of the European Central Bank, which has announced that its large-scale securities purchases (via the Asset Purchase Programme) will cease on Friday 1st July, paving the way for interest rate rises thereafter. July will see a 25-basis point rise in rates and the ECB has implied that there will be larger hikes starting in September if the data, notably the numbers underpinning inflation, call for it. The May Harmonised CPI was 8.1%, compared with 5.3% in December.
The statement from the ECB was more hawkish than the market had been expecting and saw a mild rise in the euro; Ukraine is the obvious clear influence here, with gas prices up by 51.4% and liquid fuels by 77.4%. Within the food sector, bread and cereals (remember Russia and Ukraine normally supply 30% of the world’s wheat) were up by 10.0% while fats and oils (sunflower oil in short supply) were up by 23.0%.
EU nominal and real two-year rates
Source: Bloomberg
So while the EU, like other regions in the world, is facing inflation generated by exogenous shocks that, we hope, will themselves prove to be transitory, it is incumbent upon the monetary authorities to try and contain it. The legacy of the Ukraine conflict, however, will not fade away quickly. “Stagflation” is a word in increasing usage, and interest rate policy is the tool that most central banks are using to combat it. The World Bank noted this week that sizeable rises interest rates in developed nations could bring some emerging market nations to the brink; we will be looking at this next week in terms of what this could mean for gold.
Meanwhile the EU target rate is minus 0.50% and the effective rate is -0.58%. Overnight index swap market rates are discounting a rate of +0.88% by end-year and 1.66% by April next year. And that will leave the rate still buried in negative territory, although the consensus among economists that inflation will be down to 2% in 2024 suggests that real rates will by that stage be close to parity, which would be a headwind for gold.
EU Bond Market projections for interest rate path
Source: Bloomberg
Next week sees the June meeting of the Federal Open Market Committee (FOMC) meeting, which will produce the usual set of Economic Projections and the Fed’s dot plot (Committee members’ projections for the fed funds target rate at year-end of this year, 2023 and thereafter).
With both the ECB and the FOMC embarking on quantitative tightening and raising interest rates the Official Sector still has a fine line to tread. The US economic recovery has been robust (Q1 GDP was +3.5% Y/Y, although down 1.5% Q/Q in seasonally adjusted terms), while the EU is on more fragile ground. The latest German Manufacturing orders, for example, were down 2.7% M/M, although this was better than the -4.2% posted the previous month. Year-on-year the drop was 6.6%. Meanwhile a survey conducted in early June saw 47% of respondents indicating that they are cutting back strongly or very strongly on spending, and in low-income households that proportion rises to 71%.
With these dynamics in play, along with continued geopolitical tensions, but also set against what looks like to be warming relations between the United States and the UAE with respect to the energy sector, gold is being pulled in both directions. The upshot, for now, is a US dollar price that has been in a range of just 1.8% ($1,840-1,875) for the past three weeks. Technically it is in neutral territory with the RSI at 46, with the 20-day moving average offering support at $1,846 and threatening to cross above the 10-day average at $1,850.
The physical market remains quiet with Chinese buyers still nervous of discretionary spending, especially with a mini-lockdown now in place in Shanghai, while we are at the start of the monsoon season in India – and the rupee is at record lows, having lost 4.7% so far this year (the Reserve Bank is intervening) and with COVID cases in India rising again, at a daily rate of 6.2%.
Gold in local currencies
Source: Bloomberg
The longer gold remains contained in this narrow range, the bigger the head of steam it will be build up for its next change of range. Based on the triangle formation that is developing, the next move could easily be a $22 change. The fundamentals suggest that this should be to the upside, but there is work to do yet.
Source: Bloomberg
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