FED’s stance extends sideways trend on gold

Gold did not have the best week, mainly due to the FED, whose hawkish announcements have strengthened the US dollar and increased the yield on US bonds.

The uncertain inflation situation results in volatility in the area of expectations towards gold. Although it seemed like we were at a point of potential breakout from the sideways trend, the situation changed last week, after the FED announced a plan to maintain higher interest rates for a longer period.

As a result, the price of gold continues to be under pressure, despite the weakening of the dollar on Thursday. Also, the prices of December futures contracts for gold suggest that we cannot yet expect to break the sideways trend.

The FED with one more hike

According to the CME FedWatch Tool, the probability of a hike in November or December is still priced relatively low (17.2 and 30.9 percent). In an interview with CNBC, Neel Kashkari, the president of the FED in Minneapolis, signaled that the FED has not finished its cycle of raises. From his words, it appears that one more interest rate hike is quite likely, and two are not out of the question.

In the opinion of Gary Wagner, a technical analyst working with Kitco News, the FED made a mistake by delaying action in 2021, and only raised interest rates in March 2022 after inflation exceeded 8 percent. The Federal Reserve did this while harboring a false belief that inflation is temporary and does not require action.

He believes the FED will now procrastinate both with ending the cycle of increases, and with any potential cuts, which for gold would mean an extended period of moving in a sideways trend – at least in the US dollar.

Do we already have deflation in Poland?

The National Bank of Poland continues its information campaign, initiated by banners on the main building that read: “MAIN CAUSES OF INFLATION: 1. Russian aggression against Ukraine 2. Pandemic and its consequences” and “THANKS TO NBP POLAND IS ON THE RIGHT TRACK, prices have hardly changed for 4 months!”.

The latest installment of this information campaign is a commercial in which an older man does shopping in a store, and then says:

– I noticed that I have more money left again. Prices are hardly growing, and some products are even cheaper than a few months ago.

It is worth reminding here – falling inflation does not mean falling prices, it only means a falling rate of price growth. Therefore, if the NBP claims that the prices of some products are lower, it would be necessary to check whether we are entering the territory of negative inflation, known as deflation.

Contrary to this, the results of the latest survey conducted by the central bank among macroeconomists from banks, financial institutions, and research centers attest otherwise. The average annual inflation in 2023 will be 11.9 percent, in 2024 – 6.3 percent, and in 2025 – 4.8 percent. Compared to the previous edition of the survey we see a slight decrease this year and next, but in 2025 this forecast is a bit higher. The previous results were 12.4 percent in 2023, 6.9 percent in 2024, and 4.4 percent in 2025.

Forecasts for economic activity have also been updated. In 2023, GDP growth will be 0.4 percent, in 2024 – 2.5 percent, and in 2025 – 3 percent. These are slightly lower forecasts compared to the previous edition of the survey, where growth was 0.9, 2.7, and 3.3 percent respectively.

Article by Michał Tekliński, Director for International Markets at the Goldenmark group.