According to Mining News Pro - Have you ever felt trapped in the tyranny of the status quo? Have you ever felt constrained by some invisible yet powerful forces trying to thwart the fullest realization of your potential? I guess this is what gold would feel like right now – if metals could feel anything, of course.
Please take a look at the chart below. As you can see, January looked to be quite good for the yellow metal. Its price surpassed the key level of $1,800 at the end of 2021, rallying from $1,793 to $1,847 on January 25, 2022.
Then the evil FOMC published its hawkish statement on monetary policy. In its initial response, gold slid. That’s true, but it bravely defended its positions above $1,800 during both Wednesday and Thursday. There was still hope. However, on Friday, the metal capitulated and plunged to $1,788.
Here we are again – below the level of $1,800 that gold hasn’t been able to exceed for more than several days since mid-2021, as the chart below shows. Am I disappointed? A bit. Naughty goldie! Am I surprised? Not at all.
Although I cheered the recent rally, I was unconvinced about its sustainability in the current macroeconomic context, i.e., economic recovery with tightening of monetary policy (the surprisingly positive report on GDP in the fourth quarter of 2021 didn’t probably help gold), rising interest rates, and possibly a not-distant peak in inflation.
In the previous edition of the Fundamental Gold Report, I described the Fed’s actions as “a big hawkish wave that could sink the gold bulls” and pointed out that “gold started its decline before the statement was published, which may indicate more structural weakness.” I added that it was also disturbing that “gold was hit even though the FOMC statement came largely as expected.” Last but not least, I concluded my report with a warning that “the upcoming weeks may be challenging for gold, which would have to deal with rising bond yields.”
My warning came true very quickly. Of course, we cannot exclude a relatively swift rebound. After all, gold can be quite volatile in the short-term, and this year could be particularly turbulent for the yellow metal. However, I’m afraid that the balance of risks for gold is the downside. Next month (oh boy, it’s February already!), we will see the end of quantitative easing and the first hike in the federal funds rate, followed soon by the beginning of quantitative tightening and further rate hikes.
Using its secret magic, the Fed has convinced the markets that it has become a congregation of hawks, or even a cult of the Great Hawk. According to the CME Fed Tool, future traders have started to price in five 25-basis-point raises this year, while some investors believe that the Fed will lift interest rates by 50 basis points in March. All these clearly hawkish expectations led to the rise in bond yields (see the chart below), creating downward pressure on gold.
Copper price down as dollar firms
The copper price fell on Thursday as poor risk sentiment driven by weak corporate earnings pushed the dollar up.
March delivery contracts were exchanging hands for $4.47 a pound ($9,840 a tonne) on the Comex market in New York, down 0.5% compared to Wednesday’s closing.
European shares and US equity futures declined on Thursday amid the souring mood in the stock market. The greenback snapped three days of declines as investors sought a haven, putting pressure on gold and metals priced in the currency.
U.S. businesses’ payrolls fell last month by the most since the early days of the pandemic, due to the spread of the omicron coronavirus variant, according to ADP Research Institute data. That release came ahead of Friday’s employment report from the Labor Department which will be eyed by traders to gauge the pace of wage inflation.
“The bar is very high for a data miss to derail the Fed’s hiking plans, given its commitment to inflation,” Nicky Shiels, head of metals strategy at MKS PAMP SA, wrote in a note.
On Thursday, the Bank of England lifted its key interest rate as part of measures to contain inflation, with policymakers coming close to an even bigger hike. The European Central Bank left its rates unchanged, in line with expectations.
Global copper smelting activity powered to a 13-month peak in January as operations in China ramped up ahead of seasonal construction demand, data from satellite surveillance of copper plants showed.
The number of inactive smelters fell to the lowest level since February 2018, according to a statement on Thursday from commodities broker Marex and SAVANT, a satellite analytics service it launched with Earth-i in 2019.
“The strong start to the year in the SAVANT measures of copper smelting activity corroborate our own observations from the physical markets, which is an industry supply chain that is ramping up to meet strong downstream demand,” said Guy Wolf, Marex global head of analytics.