The price of gold continues to be under pressure from a strong dollar and high returns on US bonds due to the Federal Reserve’s stance. The motto of “higher for longer” is a call to maintain interest rates at their current level for an extended period of time. The National Bank of Poland (NBP) has no dilemmas and is slashing rates amid significantly higher inflation.
The gold price quoted in the US dollar has reached levels last seen in March of this year, hovering in recent days around $1,820 per ounce.
The Federal Reserve and its “higher for longer” campaign, which pledges to keep interest rates at current (or higher) levels for an extended period, are responsible for this state of affairs. Real interest rates in the USA are currently positive (exceeding inflation), which strengthens the dollar, increases bond yields, making bonds and bank deposits more attractive for many market players compared to gold.
However, not for everyone – the low price of gold attracts those who use gold as a safe haven and as a way of storing value regardless of market conditions. Demand stays high.
There are therefore two things worth noting: gold is currently heavily oversold, and despite the Fed’s “higher for longer” stance, it will not be able to maintain interest rates at such a high level for an extended period of time due to, among other things, public debt. Sooner or later it will have to cut.
Will the Fed hike rates further this year?
According to the FedWatch Tool, the probability that the US central bank will raise rates in November is just 19.6%. In December it’s 29.4%. With each passing week, these values decrease, while public statements by various representatives of the institution have a dual tone: either we will have the end of the rate hike cycle, or we will see another 25 basis points increase this year.
This shows that despite the strong declaration of “higher for longer”, the Federal Reserve is not unanimous, and it’s more of a “wait and see” approach. Jerome Powell himself is quoted as saying in Jackson Hole, “we navigate by the stars under cloudy skies”, which ultimately reflects US inflation fighting nature.
Inflation in the USA has been falling since June of last year, from 9.1 to 3% in June of this year. However, July and August brought hikes despite higher interest rates, reported at 3.2 and 3.7%, respectively.
NBP has no dilemmas
Following a sharp cut in September, the NBP reduced rates again in October, this time by only 25 basis points. The zloty did not react as sharply, nor did it strengthen significantly. However, inflation fell – in September prices grew at a rate of 8.2% annually (compared with 10.1% in August), and it was the first time since February 2022 when this figure was single-digit.
Nevertheless, let’s delve into the nuances – fuel prices for private transport fell by 7%. However, the pace of growth in food and energy carriers fell slightly, and are currently at 10.3% and 9.9%, respectively.
Lower inflation in September could serve to legitimize current actions by the Monetary Policy Council, and thereby lead to further interest rate cuts, despite the fact that Poland’s real interest rates are negative.
Author: Michał Tekliński, Director for International Markets in Goldenmark Group
