Frequently asked questions
Why did gold prices fall to a three-month low in mid-June?
Gold prices fell to a three-month low in mid-June because the US Federal Reserve signalled that it could raise interest rates further in the coming months to curb inflation. On 14 June, gold dropped by 0.5% to reach $1,933.89 per ounce, which was its lowest level since 17 March. The central bank indicated that a slower fall in inflation will likely result in increased borrowing costs by the end of the year.
Analysts predict further weakness ahead for gold, as US interest rates could rise by an additional 0.5 percentage points by the end of 2023. This rate hike cycle, which traders expect to continue in July, coincides with other global moves. For instance, the European Central Bank is expected to raise borrowing costs to their highest level in 22 years.
How do rising interest rates in the United States affect the value of gold?
Rising interest rates in the United States generally have a negative impact on the value of gold because they tend to strengthen the US dollar. When the Federal Reserve increases borrowing costs, it underpins the dollar, making gold more expensive for buyers using other currencies. Since gold is globally denominated in US dollars, a stronger dollar reduces international demand for the metal.
Additionally, higher rates make alternative investments more attractive than non-yielding assets. With US rates projected to rise by another 0.5 percentage points by the end of 2023, and traders anticipating a July hike, analysts foresee further weakness for the precious metal. This trend is driven by the Fed’s efforts to combat a slower-than-expected decline in inflation, which keeps pressure on gold.
What is the current economic situation in the UK regarding growth and inflation?
The UK economy is currently experiencing modest, slow growth rather than a full recession, having grown by 0.2% month-on-month in April. However, this growth is uneven, as contractions have been recorded in both the manufacturing and construction sectors. Inflation also remains highly resilient and stubbornly high, driven primarily by significant wage rises across the country.
Recent wage data highlighted this inflationary pressure, showing that annual UK wage growth, excluding bonuses, reached 7.2% in the three months to April. This represents the largest wage increase on record, excluding the period during the COVID-19 pandemic. This rapid growth has prompted traders to forecast further interest rate hikes as the Bank of England tries to calm persistent inflation.
To combat this stubborn inflation, the UK central bank has already raised interest rates 12 times since late 2021, moving the base rate from a historic low of 0.1% up to its current level of 4.5%.
How are interest rates in the UK expected to change by the end of 2023?
Interest rates in the UK are expected to rise significantly by the end of 2023 as the Bank of England continues its efforts to curb stubborn inflation. Financial traders are currently anticipating a 0.25 percentage point rate rise at the central bank’s next meeting, building upon a long-term cycle of monetary tightening designed to stabilise the domestic economy.
Looking further ahead, market bets suggest that the Bank of England’s Bank Rate, which currently stands at 4.5%, could reach as high as 5.7% by the end of 2023. This aggressive path is fueled by resilient UK wage growth, which recently hit an annual rate of 7.2% excluding bonuses in the three months to April. The central bank has already raised rates 12 times since late 2021 from 0.1%.
What impact do these global economic shifts have on UK gold savers?
For UK-based gold savers, the domestic investment outlook remains relatively firm due to the steady performance of the pound sterling against the US dollar. Since gold is globally priced and denominated in US dollars, the exchange rate is incredibly important. The pound’s value is expected to remain resilient because of anticipated interest rate hikes by the Bank of England to combat stubborn inflation.
Although global gold prices fell to a three-month low of $1,933.89 per ounce on 14 June due to US rate hike signals, sterling ticked higher against the dollar. This strength was supported by modest UK economic growth of 0.2% in April and record wage growth of 7.2%. Consequently, the firm sterling outlook helps shape the final returns and relative value of holdings for domestic gold savers.
