Gold struggles in light of weak dollar as rate hikes loom

Gold continues to struggle even in light of a strong decline in the U.S. dollar. Gold had respectable gains in New York trading today, but gave up those gains in Globex trading. By the close of trading in New York today gold had added $15.10 of value and was fixed at $1664. As of 4:30 PM, EDT gold futures basis most active December contract is up only $5.80 or 0.35% and fixed at $1654.70. The December contract traded to a high of $1674.30 and a low of $1649.10 after opening just $0.80 above today’s low.

 

Dollar weakness was a major contributor in supporting gold prices from moving lower. Currently, the dollar is down 1.182 points or -1.04% and fixed at 112.025. As seen through the KGX (Kitco Gold Index) market participants were predominantly sellers with spot gold currently fixed at $1649. That is a net gain of $4.60 today. However, on closer inspection market participants were aggressive sellers taking physical gold lower by $12.80. If not for dollar weakness which added $17.40 gold’s gains would have been nonexistent.

Market participants witnessed a strong risk-on sentiment in U.S. equities. The Dow gained 1.86%, the S&P 500 gained 2.65%, and the NASDAQ composite gained 3.43%.

Market participants trading the precious metals are still genuinely concerned about the remaining two FOMC meetings in November and December. It is widely anticipated that there is a high probability that both Federal Reserve meetings will contain interest rate hikes of 75 basis points each.

According to the CME’s FedWatch tool, there is a 97.4% probability that the Federal Reserve will raise rates by ¾% at the November FOMC meeting and a 65.3% probability of a ¾% rate hike in December. This would take the fed funds rate from between 300 and 325 basis points currently to between 450 to 475 basis points by the end of 2022.

Last week market participants were active buyers of both 30-year bonds and 10-year Treasury Notes resulting in an inverted yield curve with yields in the 10-year Notes priced slightly above the 30-year bond. Today that inversion has been neutralized with both the 10-year note and the 30-year bond yielding 4.015%.

Inflation continues to run at a record level with the latest CPI core data revealing a slight uptick in inflationary pressures from 6.3% in August to 6.5% in September. However, the Eurozone is experiencing much higher levels of inflation than the United States with the CPI index registering at approximately 10%. As long as inflation remains extremely hot and persistent it is unlikely that the Federal Reserve will reduce the magnitude and frequency of rate hikes. It remains highly likely that the extremely aggressive monetary policy of the Federal Reserve will result in a recession in the first quarter of 2023. The question remains how deep of a recession will result from the Fed's aggressive rate hikes.

By Gary Wagner

Contributing to kitco.com.

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