Gold Hits 9-Month High

Gold (XAU) reached a nine-month peak at $1940.64 in recent trading on Tuesday and then stabilised below last April's high on Wednesday, January 25th. The price of the commodity has advanced in recent months due to fears of slowing economic growth and easing inflation. That brought prices about $140/oz below the record high hit back in 2020.

The move higher was attributed to concerns of a looming recession due to Wall Street's recent losses following weak corporate earnings. This kept safe haven demand elevated, which was fueled by expectations that demand in China would increase. It was the latest move in the yellow metal's upward trend since mid-December in the midst of smaller interest rate hikes from the Fed, triggered by data that US inflation has eased and the expectation it will slow the pace of hikes in the coming months.

The Latest Price Drivers

Gold prices have been supported by a weaker dollar since Monday as markets prepare for a bundle of key economic data points over the next week, including the Fed's interest rate decision on Wednesday, February 1st. Benchmark yields drifted higher, which may have put limits on gold rising, but renewed hopes of slower Fed rate hikes helped keep the price of gold higher in the latest session. Generally, bullion does better in a lower interest environment as it provides zero yield compared to treasuries.

Also, gold got an endorsement from Jim Cramer, host of CNBC’s ‘Mad Money’, as part of an argument against investing in cryptos on Monday, January 23rd. He argued that gold posted a "real hedge against inflation or economic chaos". A survey published a day later from S&P Global showed that price pressures were moving up for the first time in nearly a year. That suggests that inflation isn't yet under control, despite the efforts of the Fed. The central bank had raised rates aggressively before slowing the pace last month. (Source:CNBC)

Data released on Tuesday showed that Swiss exports of gold reached multi-year highs in 2022, with major buyers including China, Turkey, Singapore and Thailand. Meanwhile, there is an expectation that India will cut the import duty on gold, which could support retail sales heading into the peak demand season.

Risk Appetite Situation

Despite Tuesday’s highs, Gold slid slightly on Wednesday by erasing about 0.65% of its value as of the time of the writing.    It also remains closer to the lower bound as some investors booked profits ahead of key economic data expected from the US over the next seven days. The market is now focusing on Q4 GDP data to be released tomorrow, Thursday, January 26th,  as it is seen as potentially setting the tone for the Fed's policy meeting next week. Traders may refer to the Q4 GDP data to gauge how much growth slowed due to the harsh hikes in interest rates and the effects of relatively higher inflation. Price action remains mixed ahead of the meeting. 

The market is pricing in a 98% chance that the Fed will raise rates by another 25bps when it meets next Wednesday. That would be a step down on the pace from last month, where it raised by 50bps, which was also slower than the prior four months in which the Fed was raising by 75bps per meeting. 

Meanwhile, analysts point to the potential of real US GDP to turn negative in the first half of next year. This comes after companies reported mixed results for the quarter and said they are expecting a tough year ahead.

Conclusion

Spot gold prices hit the highest point since April of last year in the wake of a weaker dollar. Analysts point to there being an upside for gold as the Fed is expected to slow the pace of interest rate hikes as inflation comes down. Markets are now turning to the release of fourth quarter GDP figures expected before the Fed's policy meeting on January 31 to February 1.