Gold Prices May Fall as US PCE Data Stokes Fed Rate Hike Bets
After a weak showing in the June FOMC meeting, gold is now in the midst of a bear market as investors struggle to find direction. The recent increase in the U.S. dollar has helped fuel the price of the yellow metal. But now the Fed is signaling an upshift in the rate-hike timeline, weighing heavily on gold. A rise in interest rates will inevitably push stocks and bond prices higher, and a lower gold price is possible.
Gold prices could fall as investors put Friday’s soft third-quarter GDP print into context with inflation. The US central bank forecast two rate hikes between now and 2023. This stoked fears of’stagflation’ and a potential reversal in the Fed’s outlook. But the data isn’t the whole picture. The US PCE inflation gauge rose 4.4% on-year in September, the highest since April 1992.
Gold prices have fallen as real interest rates have risen. The trend in gold has mirrored this correlation since the early 1970s. The run-up to the all-time high in gold prices took place at a time when short-term interest rates were high. Then, interest rates had hit a low of 3.5%. This time, gold price rallied from $50 an ounce to over $850 an ounce.
Despite a dovish shift in the Fed’s policy outlook, gold prices retreated on Tuesday as Waller spoke at a Jackson Hole symposium. The CPI report for October showed a 6.2 percent on-year increase in prices. This result could spur speculation of a tightening of monetary policy by the Fed. In the meantime, GE and 3M executives are concerned about inflation.
A recent report released by the U.S. government shows that core PCE inflation remains strong, despite the dovish tone of Fed policymakers. Earlier, the rate hike had been delayed by a year, but this has changed now. The S&P 500 Index fell by over 20% during this period. Despite the weakening U.S. dollar, gold prices continue to rise.
While US PCE data may show that the US economy is in a recovery mode, Gold Prices are likely to remain in a bear market. This is also a time when the STOXX 600 index suffered its largest one-day drop in over two months. A hawkish move in the short term could lead to a rise in gold as the central bank’s actions in the long term will be counterproductive to the economy.
There is a lot of uncertainty in the next few weeks regarding the future of the Fed. In recent weeks, the uncertainty over Powell’s renomination continued to grow, as many market participants expected his re-nomination. In the end, Powell will be the Fed Chair for the next four years, which is a very long time. But a dovish president might change it’s policies.
A hawkish Fed Minutes released on June 16 may be the first hints of a Fed hawkish shift. The minutes are not median projections, but they do reflect the consensus view. The committee is likely to consider a hawkish stance in the minutes, and it could push rates higher in the future. It is hoped that this shift will result in a longer-term rise in the dollar.
On Friday, the Bureau of Economic Analysis will release a personal consumption expenditures index. The data is used as the Fed’s preferred inflation gauge. The core PCE index is expected to rise by 4.1% from last year, which would be the biggest annual jump in three decades. However, the latest U.S. PCE data may not be a good sign for gold, as it could cause a sharp drop in the price.