28/07/2023: This Week in Gold with Market Updates
Price Action:
Gold:
Gold opened the week trading at $1,962 and consolidated within a narrow 0.7% range until Wednesday. Markets were quiet on the first 2 trading days of the week in anticipation of the FED’s interest rate decision on Wednesday evening. Trading activity picked up on Wednesday hours before the FED’s decision, with gold price moving to the upside. Markets were anticipating a dovish rate hike from the FED, and this showed in the price movements. After the announcement of a 25bps increase, markets pushed higher on Thursday, reaching a weekly high of $1,980 in the process. This preceded an immediate retracement in which gold fell 1.8% to hit a weekly low just hours after it reached a weekly high. This was after the release of better than expected U.S. GDP data, in which the economy was seen to grow 2.4% in Q2. Price slightly recovered on Friday and began to make back some of the losses experienced on the previous trading day. At the time of writing, gold is trading at $1,954. Below is a graph highlighting gold’s performance throughout the week:
Silver:
Silver opened at $24.67 and experienced a 1.45% drop to close the day at $24.31. Price moved in line with gold throughout the week, as the two precious metals typically do. Both precious metals are affected by the same news, silver would experience more of a divergence to the downside when it is reacting to news. This could be seen on the 4th trading day of the week when, in response to favorable U.S. GDP news and a hike in interest rates, silver experienced an immediate 4.3% retracement from the high it experienced that day. Similarly to gold, price hit both a weekly high and a weekly low in the space of a couple of hours. At the time of writing, silver is correcting some of the losses it experienced on Thursday and is trading at $24.26. Below is a graph which showcases silver’s performance throughout the week:
Market Updates:
FED Interest Rate Decision:
The FED came to a decision to hike interest rates for the 6th time this year. A 25bps increase saw rates climb to their highest level in 22 years with the Fed Funds Rate now at a target range of 5.25%-5.5%. The July hike was expected following the June meeting, where the FED paused and an accompanying policy statement from Powell suggested that 2 more hikes may be necessary in 2023.
After the latest rate increase, it was suggested that future policy decisions will be data-driven, leaving the door open for potential future rate increases. Powell classed that decisions would be made on a meeting-by-meeting basis. Powell remains determined to bring inflation back to the 2% target range.
The latest inflation data was encouraging (CPI: 3% ; Core CPI: 4.8%), highlighting the effect that the rigorous rate hike cycle has had on cooling rising prices. However, with Core CPI (excluding food & energy) still more than double that of the target range, the FED may hike at least once more.
ECB Interest Rates:
Similarly to the FED, the ECB raised rates by 25bps (0.25%), which brought the policy rate to 3.75%, the highest level in 23 years. Christine Lagarde, the president of the ECB, stated that the Central Bank is making future decisions based on data. Lagrde stated that she is unaware of the ECB’s next move, stating it could be a pause and it could be a hike.
Like the FED, a data-driven approach will be taken.
Conclusion:
The potential fall in interest rates due to cooling inflation is good news for gold markets, as the price of gold possesses an inverse relationship with interest rates. When rates begin to fall, it would be expected that money will move into both gold and silver markets.
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