- US gross domestic product expanded slightly slower than expected in Q1.
- Markets projected an 87% chance of a 25bps Fed rate hike.
- Gold received some support due to worries about the US banking industry.
On Thursday, gold reversed course and fell as the dollar rose. Poor US economic data did not alter expectations of another interest rate hike. This is because inflation remained high.
Data showed that the US gross domestic product expanded slightly slower than expected in the most recent quarter. The US government released a preliminary estimate of first-quarter GDP growth. The gross domestic product expanded at an annualized rate of 1.1% in the previous quarter.
However, markets were more concerned with the higher-than-expected inflation rate. As a result, investors flocked to the dollar, pushing up the price of gold for holders of other currencies.
Although gold is typically a haven during economic turmoil, persistent inflation may prolong the Fed’s monetary tightening. Higher rates for longer decrease demand for the zero-yielding metal.
Markets placed an 87% chance that the US Fed would lift interest rates by 25 basis points on May 1-2. Investors are anticipating March’s core Personal Consumption Expenditures (PCE) index data, due on Friday.
Jim Wyckoff, senior analyst at Kitco Metals, said, “We might get a higher number on that PCE. It would lead to predictions of additional rate hikes. That would be bad for gold from a global demand perspective for the metals markets.”
Gold received support earlier in the day due to worries about the US banking industry. The US government’s absence in the First Republic Bank rescue effort also increased worries.
On Wednesday, investors watched to see if First Republic Bank could sell its assets and organize a recovery without the government’s help.
After a brutal sell-off, the bank’s market value momentarily fell as low as 41%. It hit roughly $888 million, its first time under $1 billion.
The discussion over the US debt ceiling, which increased Treasury yields, was also interesting. A rise in Treasury yields is never good for the non-yielding yellow metal.
According to an independent expert, Ross Norman, higher interest rates may act against gold since it offers no dividend. However, they may also benefit gold prices because they increase the likelihood of a new banking crisis.
As the banking crisis developed, gold reached $2,048.71, surpassing the previous year’s peak.