Gold prices accelerated higher in the first half of November, buoyed by nagging concerns over inflation.
Prices of gold, seen as a hedge against rising prices, rose around 2.6 percent in the second week of November, underpinned by rising consumer prices in the United States.
Spot gold prices were down 0.44 percent at 1,857.26 per ounce on Monday, November 15.
Societe Generale analysts have said that inflationary pressures could help gold prices to average around $1,950 per ounce in the first quarter of 2022.
Recent signals from the U.S. Federal Reserve (central bank) that a climate of low interest rates could persist for some time to stimulate the economy, have supported bullion.
However, the latest U.S. October prices data, revealed in November, showing that inflation was running at an annualised projected rate of more than 6 percent, suggested that the U.S. Federal Reserve could move to raise interest rates faster than expected.
“We had already assumed that U.S. inflation was likely rising faster than had been being predicted by the Fed and the mainstream media,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.
“With the runup to Thanksgiving and Christmas, coupled with the current supply-chain issues, we suspect the North American inflation rise may get worse before it gets better.”
Low interest rates have buoyed prices of gold, which bears no yield. If interest rates rise, alternative interest-bearing assets to gold can become relatively more appealing to investors.
If central banks start raising interest rates to put the brakes on inflation, gold prices risk correcting downwards, analysts say.
The pound edged higher against the U.S. dollar in the second week of November, supported by an easing of tensions between Britain and the EU over trade at the Northern Ireland border.
A firmer pound makes it more affordable for UK-based savers to buy dollar-denominated bullion.
The pound fell more than 6 percent against the dollar in the last six months as the economy was hit by supply chain bottlenecks, labour shortages and a fuel distribution crisis.
Monetary policy could also have an impact on the pound in the coming weeks.
After the Bank of England decided to leave interest rates unchanged in November, surprising many analysts who had expected an increase, attention has shifted to the next rate-setting meeting of the UK central bank in December when rates could rise, potentially supporting the pound further.
Many analysts believe that as the Bank of England held rates steady, it will be more likely to tighten monetary policy at its meeting next month in order to keep a lid on inflationary pressures.
However, the latest economic growth data from the UK, showing slowing economic growth between July and September, could add to pressure on the Bank of England to leave rates unchanged at their current historic lows, in order not to risk destabilising the economic recovery.
Frequently asked questions
Why did gold prices rise during the first half of November?
Gold prices accelerated higher in the first half of November primarily due to persistent global concerns over inflation. Investors traditionally view gold as a reliable hedge against rising prices, and this sentiment drove a price increase of approximately 2.6 percent during the second week of November alone.
This upward momentum was heavily underpinned by the release of rising consumer price index data in the United States, which indicated that inflation was running at an annualised projected rate of more than 6 percent. Additionally, recent signals from the US Federal Reserve suggesting that a low interest rate climate could persist for some time to stimulate the economy further supported bullion. Because gold bears no yield, low interest rates keep it highly attractive compared to other assets. However, the unexpectedly high inflation data also sparked some concerns that the central bank might have to raise interest rates faster than previously anticipated.
What are analysts predicting for gold prices in early 2022?
Analysts from Societe Generale have suggested that ongoing inflationary pressures could help gold prices to average around $1,950 per ounce during the first quarter of 2022. This projection reflects the continuing appeal of bullion as a hedge against rising costs, especially as supply-chain disruptions and holiday demand are expected to keep inflation elevated.
However, market commentators like Lawrie Williams from bullion dealer Sharps Pixley note that North American inflation may get worse before it gets better, influenced by the runup to Thanksgiving and Christmas. While high inflation generally supports gold, the ultimate trajectory of the precious metal will depend on how central banks react. If central banks are forced to raise interest rates quickly to combat this inflation, alternative interest-bearing assets could become more appealing to investors, potentially causing gold prices to correct downwards from these projected highs.
How do interest rate changes affect the price of gold?
Interest rates have a direct and significant impact on the price of gold because the precious metal is a non-yielding asset. When interest rates remain low, gold becomes highly attractive to investors because the opportunity cost of holding it is low, which helps buoy its market price.
Conversely, if central banks decide to raise interest rates to control inflation, alternative interest-bearing assets become relatively more appealing to investors. This shift in preference can lead to a decrease in demand for bullion. Consequently, analysts warn that if major central banks start raising interest rates to put the brakes on rising consumer prices, gold prices risk correcting downwards as investors move their capital into yield-generating alternatives.
Why did the pound sterling strengthen in mid-November?
The British pound edged higher against the US dollar during the second week of November, driven by political and economic factors. A key driver for this modest recovery was the easing of trade tensions between Britain and the European Union regarding the sensitive Northern Ireland border.
This political relief provided a much-needed boost, especially after a challenging six-month period where the pound had fallen by more than 6 percent against the dollar. That prior decline was caused by severe domestic economic challenges, including supply chain bottlenecks, labour shortages, and a widespread fuel distribution crisis. For British precious metal investors, a firmer pound is a positive development, as a stronger domestic currency makes purchasing dollar-denominated bullion more affordable.
Will the Bank of England raise interest rates soon?
The Bank of England surprised many market analysts in November by choosing to leave interest rates unchanged at their historic lows. However, attention has rapidly shifted to the central bank’s next rate-setting meeting in December, where many analysts believe a rate hike is highly likely.
The main argument for raising rates is to control mounting inflationary pressures. Despite this, the decision is not clear-cut. Recent economic data revealed that UK economic growth slowed down between July and September. This slower growth could put pressure on the Bank of England to keep interest rates steady, as policymakers will want to avoid any sudden changes that might destabilise the ongoing economic recovery.
