Fundamental Analysis

The Uncertainty of Gold Prices in the Face of Rate Hikes

  • Gold prices maintain a broadly bearish bias on Friday.  
  • Investors are uneasy over lingering worries about the US economy.
  • More Americans filed new unemployment benefit claims last week.

Gold prices rose sharply from the daily lows of $1,852, hitting the daily highs of around $1,875 during the early hours of trading on Friday. However, gold couldn’t sustain the gains and fell again.

Despite comments from Federal Reserve (Fed) members on Thursday that additional rate hikes are needed to control inflation, the dollar weakened. The global market has grown uneasy due to lingering economic concerns and the pace of interest rate increases by central banks. Still, gold prices did not benefit from the weaker dollar as it closed the trading day lower.

According to Quincy Krosby, Chief Global Strategist at LPL Financial in Charlotte, North Carolina, the market is confused because it thought it knew that the Fed was close to finishing its cycle of rate hikes, despite the Fed’s rhetoric.

Krosby also highlights the inversion of the yield differential between short- and longer-dated Treasuries as a cause for concern, as this occurs when the yield on the two-year note is higher than the yield on the ten-year note. After steepening to -87.5 bps earlier in the session, the difference between the rates on two and ten-year bonds remained inverted at -82.3 bps.

Gold has a history of advancing during times of recession and is considered a valuable investment during economic hardship, although not a guarantee.

US initial jobless claims (Source: Bloomberg)
US initial jobless claims (Source: Bloomberg)

The number of Americans filing new unemployment benefit claims was higher than expected last week, which eased worries about continuing interest rate hikes.

However, several giant corporations, including Meta, IBM, and Amazon, are laying off thousands of workers. Many of the layoffs are from battered technology companies that aggressively hired during the pandemic, notes Goldman Sachs analyst Ronnie Walker. He indicated that these companies are not representative of the larger economy.

In fact, the number of jobs created in the United States dramatically increased in January as the unemployment rate dropped to 3.4%, the lowest level since 1969. Additionally, job growth in 2022 was significantly stronger than anticipated, prompting Fed chair Jerome Powell to make hawkish remarks. 

However, a strong US labor market could limit any gold price increases as higher interest rates would make storing zero-yield bullion more expensive.