Gold prices fell around 4 percent in the second week of May, pressured by expectations of more U.S. rate rises in the pipeline to control inflation, and by a rising dollar.
Gold slid to $1,798.86 per ounce on May 13, its lowest level since February 4, before clawing back some ground to $1,810.68 later in the day, and marked its fourth consecutive weekly fall.
A warning from the U.S. Federal Reserve that more pain was on the horizon in the war on inflation, strengthened the outlook for increasing interest rates which could drag on prices of gold.
Gold bears no interest, so a climate of rising interest rates makes other assets more attractive to investors.
“The 8.3% pace (in U.S. Consumer Price Inflation) in April is problematic, especially after markets were expecting 8.1%. That automatically told us that the Federal Reserve would not soften its hawkish stance,” TD Securities head of global strategy Bart Melek told Kitco News. “It’s unlikely that inflation will come off sharply any time soon.”
Inflation levels will likely be exacerbated as sanctions being imposed on Russia as a result of the war on Ukraine, and corresponding retaliatory action, have a growing impact on the considerable levels of Russian exports to the West – in particular of energy, metals and agricultural-related commodities, and the additional costs of replacing these from other supply sources, wrote Lawrie Willliams, precious metals analyst with bullion dealer Sharps Pixley.
“The impacts of these changes in the supply pipeline in some cases will take months, if not years, to filter through and thus cumulatively contribute to inflationary pressures for some time to come,” Williams wrote.
The dollar has also strengthened in recent weeks due to its “safe haven” appeal, underpinned by the prospects for more rate rises.
The dollar index was on track for a sixth straight weekly gain in the second week of May, near a 20-year high.
“The US dollar index and the precious metals market are like reverse images,” wrote analyst Przemyslaw Radomski on FXSTREET.
The British pound edged up late on May 13, but was not far off two-year lows touched the previous day, weighed by concerns over a weakening UK economy,
Disappointing March GDP data and worries over stagflation, raise risks of a slowing down of the Bank of England’s rate rising cycle.
A soft pound will make it costlier for UK-based savers looking to boost their dollar-denominated gold holdings, but the strength of the dollar could drag gold lower.
UK GDP shrank 0.1 percent in March after a sharp fall in vehicle sales amid supply chain problems.
Frequently asked questions
Why did gold prices fall in the second week of May?
Gold prices fell by approximately 4 per cent in the second week of May due to a combination of expected US interest rate increases and a strengthening US dollar. The precious metal slid to a low of $1,798.86 per ounce on 13 May, which was its lowest valuation since early February, marking a fourth consecutive weekly decline.
A primary driver for this drop is the Federal Reserve’s aggressive approach to tackling inflation, which stood at 8.3 per cent in April. Because gold does not yield any interest, an economic climate with rising interest rates naturally makes alternative, interest-bearing assets far more appealing to investors. Additionally, the US dollar has strengthened significantly, acting as a preferred safe-haven asset and further putting downward pressure on the price of gold.
How is the conflict in Ukraine affecting inflation and the price of gold?
The war in Ukraine is exacerbating global inflation through the economic sanctions imposed on Russia and the subsequent retaliatory actions. These geopolitical tensions have severely disrupted Russian exports to Western nations, particularly impacting critical supplies of energy, metals, and agricultural commodities. Replacing these essential resources from alternative global suppliers introduces substantial extra costs.
According to analysts, these major disruptions in the global supply pipeline are complex and will take months, or potentially even years, to fully filter through the economy. Consequently, these supply chain pressures are expected to contribute cumulatively to high inflation levels for a considerable time to come. While inflation typically supports gold, the resulting aggressive interest rate hikes by central banks to combat this inflation continue to drag gold prices down.
What is the relationship between the US dollar and precious metals like gold?
The US dollar and the precious metals market share an inverse relationship, often described by financial analysts as behaving like reverse images of one another. When the US dollar strengthens, gold prices typically experience downward pressure. Recently, the US dollar index has been on track for its sixth consecutive weekly gain, hovering near a twenty-year high.
This substantial dollar strength has been underpinned by the prospect of successive interest rate rises by the US Federal Reserve, alongside the currency’s strong appeal as a safe-haven asset during times of economic uncertainty. As the dollar climbs higher and higher, gold becomes more expensive for buyers using other currencies. This inverse dynamic makes the dollar a direct competitor to non-yielding gold, ultimately pulling precious metal prices down as the greenback rises.
How does the weak British pound impact gold buyers in the UK?
A weak British pound directly impacts UK savers by making it significantly more expensive to purchase and boost their holdings of gold. Because gold is internationally denominated in US dollars, any depreciation of the pound sterling against the greenback means that UK buyers must spend more local currency to acquire the same amount of the precious metal.
The pound has recently faced downward pressure, trading near two-year lows due to concerns over a weakening UK economy and disappointing GDP data, which contracted by 0.1 per cent in March. This economic slowdown, combined with stagflation worries, may force the Bank of England to slow down its rate-rising cycle. Ultimately, while a strong dollar drags global gold prices lower, the weak pound offsets these savings for UK-based investors, raising their overall acquisition costs.
Why is the US Federal Reserve maintaining a hawkish stance on interest rates?
The US Federal Reserve is maintaining a highly hawkish stance to combat persistently high inflation, which reached an annual pace of 8.3 per cent in April. This inflation rate surprised financial markets, which had widely expected a slightly lower figure of 8.1 per cent. This higher-than-expected data signalled to analysts that the central bank would not soften its aggressive monetary policy.
With inflation unlikely to decline sharply in the near future, the Federal Reserve has warned that more economic pain is on the horizon. To bring consumer prices under control, the central bank plans to implement more interest rate rises. This outlook has strengthened the US dollar and raised yields, which in turn reduces the investment appeal of non-interest-bearing assets like gold, as investors seek higher returns elsewhere.
