Gold continues to reach fresh cycle highs, currently trading at a nine-month high near $1940, some 320 dollars above the November low and just 130 dollars below the March 2022 record high at $2070. The yellow metal is finding fresh demand from traders and investors seeing an improved outlook as last year’s headwinds, from rate hikes to rising yields and dollar become tailwinds as rate hikes eventually pauses while yields and the dollar softens amid concerns about the economic outlook.
The US Leading Indicator (LEI) fell sharply again in December as it continues to signal recession for the US economy in the near term said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead. Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust. Nonetheless, industrial production— also a component of the CEI—fell for the third straight month. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.”
Except strong job reports, a recent spate of weaker than economic data have raised the risk of an economic slowdown which together with softening inflation may see the FOMC go into pause mode sooner than previously expected. The market is currently pricing in a peak in the Fed funds rate just below 5% to occur between March and June followed by a pause before a couple of rate cuts could see the rate end the year around 4.5%. Whether these market projections turns out to be correct or not is not the focus right now as traders and speculators are busy building exposure amid continued momentum.
The chart below shows the strong reaction in gold in the months and quarters that followed the three previous peaks in US rates during the past 20 years. The market is currently forecasting one or two further US rate hikes before pausing at or below 5%. Should history repeat itself, gold may have a significant further upside.