Gold Sees Brief Dip Below $2,000 Amidst Delayed U.S. Rate Cut Prospects and Economic Indicators
Gold prices briefly fell below $2,000 per ounce for the first time in two months in mid-February before later recovering ground and hovering just above this key support level, weighed by expectations that the U.S. Federal Reserve (central bank) may wait further before possibly cutting interest rates.
Gold was up 0.68 percent at $2,007.26 per ounce on February 15.
Gold prices traded near the $2,000 level after the number of U.S. workers applying for first-time unemployment benefits last week came in below expectations.
On February 15, the U.S. Labor Department said that weekly jobless claims decreased by 8,000 to 212,000 during the week ending February 10, down from the previous week’s estimate of 220,000 claims.
Hopes of a spring 2024 U.S. rate cut have receded after higher-than-expected January U.S. inflation data, which was due to an increase in costs of shelter and health care.
U.S. monetary authorities will want to see more evidence that inflation is coming under control, before reducing rates.
A U.S. rate cut in June 2024, instead of as initially foreseen in March, or in May, is now expected by many analysts.
The delay in prospects for a U.S. rate cut has dragged on the gold price, which hit a record peak late in 2023, and has boosted the dollar against other currencies, including the pound.
A U.S. rate cut may reduce the return on yield-bearing assets relative to bullion which bears no yield.
Earlier in February, the pound fell to its lowest since mid-December as comments from Federal Reserve Chair Jerome Powell, and buoyant U.S. economic data, combined to strengthen the dollar.
Near term outlook for a soft pound
The Bank of England has recently held interest rates at 5.25%, but opened up the possibility of cutting them as UK inflation falls.
Annualised UK inflation remained steady at 4 percent in January on the back of easing prices for furniture and household goods, food and non-alcoholic beverages.
News on February 15 that Britain was in recession in the second half of 2023, dragged on the pound versus the dollar.
GDP shrank by 0.3% in the last quarter of the year – October to December – following a fall of 0.1% in the previous three-month period.
However, despite UK GDP falling in successive quarters, it did grow by 0.1% across the whole of 2023, data showed.
A weaker pound against the dollar, boosts the sterling-denominated return of sales of dollar-denominated gold by UK-based savers.
Frequently asked questions
Why did gold prices drop below the two thousand dollar mark in mid-February?
Gold prices dipped briefly below $2,000 per ounce in mid-February due to growing expectations that the U.S. Federal Reserve will delay cutting interest rates. Stronger-than-expected economic indicators, such as low weekly jobless claims and high inflation data, have led market analysts to believe that U.S. monetary authorities will wait for more evidence that inflation is under control before easing rates.
Specifically, hopes of a spring rate cut have receded, shifting market expectations to a potential cut in June 2024 rather than March or May. Because gold is a non-yielding asset, the prospect of prolonged high interest rates reduces its appeal compared to yield-bearing assets, which temporarily dragged down its price. However, the price quickly recovered, hovering just above the key $2,000 support level shortly after the dip.
What U.S. economic data has influenced the delay in interest rate cuts?
Several key pieces of economic data from the United States have influenced the decision to delay interest rate cuts. Firstly, the labor market remains resilient, with the number of workers applying for first-time unemployment benefits falling below expectations to 212,000 for the week ending 10 February, down from 220,000 the previous week.
Secondly, U.S. consumer price inflation for January came in higher than anticipated, driven primarily by rising costs in shelter and healthcare. These factors indicate that the U.S. economy remains highly active, suggesting that inflation is not yet fully under control. As a result, U.S. monetary authorities are likely to hold interest rates steady for longer to ensure economic stability before committing to any rate reductions, pushing expectations of a rate cut to June 2024.
How does a weaker British pound affect gold savers based in the UK?
A weaker British pound relative to the U.S. dollar actually provides a boost to gold savers based in the United Kingdom. Because gold is globally priced and traded in U.S. dollars, any depreciation of the pound increases the sterling-denominated return when these savers sell their gold assets.
When the pound falls in value, each dollar that the gold is worth translates into more pounds sterling upon conversion. Consequently, UK-based investors can see higher local currency returns on their dollar-denominated gold investments during periods when the pound is soft. This dynamic was evident in early 2024, when strong U.S. economic data and cautious comments from Federal Reserve Chair Jerome Powell strengthened the dollar, simultaneously weakening the pound and raising the domestic value of gold for UK holders.
What is the current economic situation regarding inflation and growth in the UK?
The United Kingdom entered a technical recession in the second half of 2023, with the gross domestic product contracting by 0.3 percent in the final quarter of the year, following a 0.1 percent decline in the previous quarter. Despite this contraction, the UK economy did manage a minor growth of 0.1 percent across the whole of 2023.
Meanwhile, annualised UK inflation remained steady at 4 percent in January, aided by easing prices for furniture, household goods, food, and non-alcoholic beverages. In response to these conditions, the Bank of England has held its benchmark interest rate at 5.25 percent. However, policymakers have indicated that they are open to cutting interest rates in the future as inflation continues to fall, creating a soft near-term outlook for the British pound.
Why do U.S. interest rates have such a strong impact on gold prices?
U.S. interest rates have a significant impact on gold prices because gold is a non-yielding asset, meaning it does not pay regular interest or dividends to investors who hold it. When the Federal Reserve maintains high interest rates, yield-bearing assets like government bonds become more attractive because they offer guaranteed, higher returns.
Conversely, when the Federal Reserve cuts interest rates, the return on those yield-bearing assets declines. This makes bullion relatively more attractive to global investors looking to preserve wealth, which typically drives up demand and boosts the price of gold. Because of this inverse relationship, any news or economic data suggesting a delay in rate cuts strengthens the U.S. dollar and puts downward pressure on gold prices, as seen when gold briefly dipped below $2,000 in early 2024.
