Gold slipped in mid-January, pressured by a firmer dollar and sentiment that U.S. interest rates could rise in order to tame inflation.
Gold eased 0.3 percent to $1,816.22 per ounce on January 14, weighed by a stronger dollar and firmer Treasury yields on prospects of U.S. interest rate rises. Upside in the greenback makes dollar-denominated gold more expensive in terms of other currencies.
The U.S. economy is seeing a level of inflation not seen in decades.
This is relevant to gold as the U.S. markets have a big impact on the price of bullion.
Economists see risks that U.S. consumer price inflation could rise from current annualised levels of around 7 percent.
“There are worries that the U.S. Federal Reserve may raise interest rates at an enhanced rate to try and control inflation,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.
A climate of rising U.S. interest rates can make non-yielding bullion less attractive to investors.
“Above expectation rises could put a temporary dampener on the gold price. So far, though, the Fed has tended to be cautious on policy implementations that might depress U.S. economic growth and it may be able to live a little longer with a high inflation level,” Williams wrote.
The price outlook for gold is looking better going into the third week of the new year, wrote Kitco News correspondent Anna Golubova.
“Analysts are weighing the consequences of a potential monetary policy mistake as the U.S. Federal Reserve (central bank) gets more hawkish amid the latest inflation data,” she wrote.
“The two key datasets keeping markets in a risk-off mood are inflation and retail sales. In the U.S., inflation ran at the hottest pace since 1982 in December,” she added. “Meanwhile, retail sales were down the most in 10 months, falling 1.9%.”
Retail sales fell as Americans struggled with shortages of goods due to supply chain bottlenecks and an explosion of COVID-19 infections.
Two leading drivers for gold going forward will be the U.S. dollar and bond yields, economists say.
For UK gold savers, the pound appears set to remain well-supported against the dollar as economists expect further rate rises by the Bank of England this year to control inflation. A stronger pound would make purchases of dollar-denominated gold more affordable.
Some economists see the possibility of a 25 basis points hike at the February meeting of the central bank.
The possibility of a leadership challenge to Prime Minister Boris Johnson could further support sterling as possible successors such as Chancellor Rishi Sunak or Foreign Secretary Liz Truss could bring a calmer, less erratic approach to government, some market commentators say.
Frequently asked questions
What caused the price of gold to slip in mid-January 2022?
Gold dipped around mid-January 2022 due to a combination of a strengthening US dollar and growing sentiment that US interest rates would rise to curb inflation. On 14 January, the price of gold eased by 0.3 per cent to $1,816.22 per ounce. This downward movement was directly weighed down by the firmer dollar and stronger Treasury yields.
A stronger greenback typically exerts downward pressure on the precious metal because it makes dollar-denominated gold more expensive for buyers using other currencies. Furthermore, the prospect of rising interest rates in the United States generally makes non-yielding bullion less attractive to global investors who might otherwise seek safer returns elsewhere. Because the US economy was experiencing historic levels of inflation, the market increasingly anticipated aggressive monetary action from the Federal Reserve, which ultimately dampened investor enthusiasm for gold during this specific period.
How does inflation in the US affect the global gold market?
Inflation in the United States has a significant impact on the price of gold because US markets heavily influence global bullion pricing. In late 2021 and early 2022, US consumer price inflation reached annualised levels of around 7 per cent, representing the hottest pace of inflation since 1982. This extreme surge raised worries that the US Federal Reserve would hike interest rates rapidly to regain control of the economy.
When interest rates rise, non-yielding assets like gold tend to lose their appeal to investors compared to interest-bearing assets. However, market commentators noted that the Fed has historically been cautious about implementing policies that could depress economic growth, meaning they might tolerate high inflation for a bit longer. Analysts are closely watching for any potential monetary policy mistakes as the central bank adopts a more hawkish stance in response to these inflation figures.
What factors caused the drop in US retail sales in late 2021?
US retail sales experienced a sharp decline of 1.9 per cent, marking the largest drop seen in ten months. This decline occurred alongside the historic inflation data, keeping financial markets in a cautious, risk-off mood. The primary reasons behind this retail slump were supply chain bottlenecks and a massive surge in COVID-19 cases.
During this period, ordinary Americans struggled with widespread shortages of everyday goods due to global shipping and supply disruptions. At the same time, an explosion of COVID-19 infections further restricted consumer activity and strained retail operations. Together, these factors severely restricted consumer spending, leading to the dramatic downturn in retail data that analysts had to weigh alongside rising inflation when predicting the future direction of the US economy and monetary policy.
How does the value of the British pound affect UK gold buyers?
For gold savers based in the UK, the strength of the British pound sterling is a crucial factor because gold is globally denominated in US dollars. When the pound is strong against the dollar, it makes purchasing gold much more affordable for UK buyers, as they get more dollars for their sterling. In early 2022, the pound appeared set to remain well-supported against the US dollar.
This expected strength in sterling was driven by economists’ forecasts that the Bank of England would introduce further interest rate rises to control domestic inflation. Some economists even anticipated a 25 basis points rate hike at the central bank’s February meeting. A higher interest rate in the UK generally supports the value of the currency, directly benefiting local gold buyers by lowering the effective purchase price of the dollar-denominated metal.
Can political changes in the UK influence the value of sterling?
Yes, political developments in the UK can have a direct impact on the strength of the British pound. In early 2022, the possibility of a leadership challenge to Prime Minister Boris Johnson was viewed by market commentators as a factor that could potentially support sterling. This political uncertainty was not necessarily seen as negative for the currency.
Commentators suggested that potential successors, such as Chancellor Rishi Sunak or Foreign Secretary Liz Truss, could bring a calmer and less erratic approach to government administration. Investors and market participants often favour stability and predictability. Therefore, the prospect of a transition to a more stable leadership style was seen as a potential boost for the pound, which in turn would influence the purchasing power of UK-based investors looking to acquire gold assets.
