Gold News

Gold and Silver Erase Big Swings After US Fed Raises Rate Forecast, Inflation Drops

GOLD and SILVER PRICES traded unchanged Thursday morning from the same time yesterday, erasing volatile swings made after the US Federal Reserve left Dollar interest rates unchanged and raised its year-end rate forecast despite slower inflation in the world's largest economy.
New data Wednesday said consumer prices were unchanged in May from the month before, trimming the headline rate of inflation by 0.1 percentage points to 3.3% per annum.
So-called 'core' inflation excluding fuel and food also dropped harder than expected, down to the slowest in 3 years at 3.4%.
Gold spiked to $2340 per Troy ounce on the inflation data, but fell back after the Fed decision to trade around $2315 once more.
Silver prices whipped more violently, hitting a 3-session high of $30.20 per Troy ounce only to sink overnight to $28.80 before rallying by 50 cents.
"Inflation has eased over the past year but remains elevated," said the US central bank in yesterday's policy statement, leaving the cost of borrowing at a 2-decade high of 5.33% per annum in the Fed Funds market.
Adding that it "remains highly attentive to inflation risks" the Fed's policy committee also hiked its year-end rate forecast from the 4.6% level predicted last December – and repeated in March – back up to 5.1%, signalling that officials expect to make only one cut before the end of 2024.
Chart of gold priced in Dollars vs. Fed Funds rate forecasts for end-2024. Source: BullionVault
Market-based forecasts for the Fed Funds rate edged lower despite the central bank's new higher prediction, reaching just 4.84% per annum. 
Rather than moving inversely to Fed rate expectations, the Dollar price of gold from the end of March to last Friday's steep gold drop had moved in the same direction as Fed rate expectations 62% of the time on a rolling 1-week basis.
J.P.Morgan's "multi-regression model with 4 inputs has fair value gold at $800," says metals strategist Nicky Shiels at Swiss bullion refining and finance group MKS Pamp, adding that "our multiple regression [model] with 3 real yield inputs has gold at $1300/oz."
But "the interest-rate environment that lies ahead will be bullish for gold," says economist and investment strategist David Rosenberg, because "the smart money moving into gold is probably thinking we're at the peak of the economic cycle, inflation is going to come down [and so] the Fed will be cutting interest rates."
"Gold is no longer being viewed as a commodity, it's being viewed as a currency that is no country's liability."
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Washington's borrowing costs fell further as debt prices rose Thursday, edging 10-year US Treasury yields down towards last Thursday's 10-week low at 4.31% per annum, but European borrowing costs edged higher once more following the weekend's big gains for 'far right' parties in the European Parliament elections.
European stock markets also fell in price Thursday, dropping in contrast to US equities, which had extended their gains on Wednesday's softer inflation data and Fed statement, with the S&P500 index setting its 4th new all-time closing high in June so far.
Gold priced in the Euro briefly dipped through €2140 per Troy ounce, while UK gold prices also held little changed for the week so far at £1810.
The cost of living in world No.2 economy China meantime slipped 0.1% last month from April, new data said Wednesday, cutting annual inflation to 0.3%.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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