Despite the strengthening dollar, gold prices rose $50/oz in late October. The Fed is expected to raise interest rates in December, which could lead to gold prices falling back towards $1,620. However, investors await remarks from Fed Chair Jerome Powell on Wednesday. His comments could signal that interest rates could be rising soon, and could slow the pace of asset purchases.
The US Consumer Price Index (CPI) is released by the Bureau of Labor Statistics on a monthly basis, and measures the overall health of the economy. The report includes statistics on prices of different goods and services, and it is used to gauge the health of the economy and determine eligibility for government programs. In October, the PCE Core Price Index rose 0.2% month-over-month, while the overall CPI increased 0.4%. The PCE Core Price Index is the “core” CPI, which strips out volatile food and energy prices. This month, the core CPI rose 6.6% year-over-year, a 40-year high for the measure.
While the PCE Core Price Index and overall CPI are positive readings, the PCE Deflator rose 0.3% m/m, below expectations for a 0.4% rise. This may indicate that inflation is slowing, and could lead to further Fed rate hikes in the near future. The Fed’s aggressive monetary policy has been harsh on bond markets worldwide, and the rise in real US yields has increased the opportunity cost of holding non-yielding bullion. The Fed is expected to raise interest rates by 75 basis points in December.
However, signs of inflation slowing could also lead the Federal Reserve to change its monetary policy, and may reduce the rate of asset purchases. It may also encourage the Fed to impose regulation on financial policy. Regardless, the Fed is still willing to risk economic damage to combat inflation.
The Fed is also expected to publish a new Summary of Economic Projections (SEP) at its final meeting for 2022, which could be a good indicator of the direction of monetary policy in the coming months. Speculators are betting on lower prices, as the COMEX gold price is trading near its lowest levels in more than two years. The Fed fund futures contract is pricing in a 72% chance of a 50-basis-point hike in December.
Meanwhile, gold has slipped 20% from its March peak. The Fed’s aggressive monetary policy, coupled with the strengthening dollar, has left gold prices vulnerable to rising interest rates. Gold prices could continue to fall back towards $1,620, but could recover if they break above October’s high of $1,730. If they fail to break above that level, gold could begin to unravel, as its beneficial properties will begin to erode.
The Fed’s aggressive monetary policy has also hurt the economy, and the rising yields have strained bond markets worldwide. The Fed has taken aggressive measures to address inflation, but they have failed to cool the labor market. In fact, the US labor market has shown signs of weakening. The general marketplace is concerned that inflation may lead to a recession.