March 27, 2023

Gold started in November like a lamb, but can end like a lion

There is a proverb about the weather in the Northern Hemisphere because every year winter turns to spring. The proverb says that “March comes in like a lion and goes out like a lamb”. Although the proverb began as a reference to astronomy, referring to the position of the constellations Leo the Lion and Aries the Ram, it eventually evolved into a summary of how March is typically the month when the winter season ends and spring begins.

Based on recent events related to the Federal Reserve, we could conclude that in November gold started like a lamb with a price drop and it looks like it could end like a lion. Gold certainly looked like it started in November and will continue to trade under pricing pressure.

Action by the Federal Reserve certainly took on an aggressively hawkish stance as the Fed wrapped up its November FOMC meeting on Wednesday this week and, as expected, raised its benchmark interest rate by 75 basis points for the fourth straight time. This puts its feeder fund rate between 375-400 basis points. The net result was an extremely volatile day in gold, with December’s most active Contract trading high around $1673 and low $1637.80, closing almost exactly where it opened at $1650.

At a press conference half an hour after the meeting ended, Chairman Powell made it clear that the “ultimate level” of interest rates would likely be higher than previously thought, adding that he believed the window for a soft decline had narrowed significantly.

The value of the dollar has fallen significantly and gold has a very strong rise

The idea that gold would be lukewarm on modest performance, characterized by sideways trading or a loss of value, was at least beaten down today after the US Labor Department released its Non-Farm Payroll jobs report today. The report revealed that the US economy is strong, gaining 261,000 new jobs in October. The actual numbers beat the Wall Street Journal estimate of just 205,000 job additions last month. However, the report also showed a dramatic increase in the US unemployment rate, now at 3.7%.

And it was the rising unemployment rate that was the underlying force that halted gold’s decline and the US dollar’s rally as it fueled belief that the Federal Reserve’s extremely hawkish monetary policy could begin to ease to a new pace. interest rate hikes.

The US dollar fell significantly, a total of 1.92%, with the dollar index currently at 110.64. But gold and silver performed brilliantly today with gold up 3.12% leading to a gain of $50.80 in the most active December contract which is currently fixed at $1680.20. December’s silver shined even hotter, rising 7.64%, and today’s $1.485 gain is now at $20.915.

This change in market sentiment is reflected in CME’s FedWatch tool, which predicted a 35.2 percent chance that the Fed’s benchmark interest rate would be between 425 and 450 basis points a month ago on October 4. Currently, this probability indicator suggests that the rate is 61.5 percent. the probability that by the end of 2022 the reference rates will be between 4 ¼ % and 4 ½ %.

However, expectations that the Federal Reserve will slow down the strength of future interest rate hikes do not suggest that the Fed will not raise interest rates. Economists, analysts and members of the Federal Reserve have suggested that it is realistic to expect the Fed’s benchmark interest rate to rise from as much as 5 percent to 5 ½ percent. It is generally accepted that market participants are already starting to factor interest rates of 5 percent or higher into current pricing.

But wait, there’s more

Finally, there is a report coming out that could easily have a significant impact on the Fed’s decision in December, and that is next week’s CPI inflation report. On Thursday, November 10, the Finnish Labor Statistics Office will publish the latest data on “headline inflation”, i.e. the consumer price index.

In the Forbes magazine article “October’s CPI may be significantly lower than expected”, it was estimated that the CPI inflation index could easily drop slightly from 8.2% in September to 8% year-on-year. This is based on the Federal Reserve Bank of Cleveland’s “Inflation NowCasting.”

If we see a small drop in inflation next week, that could push gold past its current $1,685 resistance, with the precious metal once again challenging $1,700.

For those who want more information, please use this link.

As always, I wish you good trading and good health,

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect his own Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not a solicitation to make exchanges in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and/or damage arising from the use of this publication.

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