Last week, the yellow metal rose marginally to settle above $1,800 an ounce. The reason for the rise in prices for precious metal was the decline in the dollar index against the euro and yen. The US currency began to decline in price after it became known about the "aggressive" position of Europe's main financial regulator regarding monetary policy.
Gold was also supported by US unemployment statistics. In January, the figure rose to 4%, up from 3.9% in November. Unemployment was previously forecast to remain at the November level of 3.9% in January. The number of employed workers in non-agricultural sectors of the economy increased by 467 thousand, which is less than last month (510 thousand) The labor market is not as strong as the Fed expected. This situation could lead to a further weakening of the American currency.
Investors are not very active in buying gold. They are more attracted to the 10-year American "Treasuries," whose yield rose from 1.771% to 1.847%. The focus of market participants is high inflation rates in the world. Traders are awaiting a formal announcement from the Fed on the direction of monetary policy.
'Financial bubble 'could explode in stock market
At the Fed, they persistently want to raise the interest rate. According to experts, the cycle of tightening monetary policy may begin as early as March. This fact puts pressure on the gold market, since when rates rise, paper currencies become more attractive assets for investors than the yellow metal. The expectation of Fed policy tightening is intensifying, along with gold functioning as a hedge for inflation, so its quotes have been in a narrow range for the past few months. After the speech of the head of the Fed, Jerome Powell, at the last meeting of the department, traders began to expect another, fifth in a row, increase in rates this year. Now there is a risk of a 50 basis point rate increase at once.
Analysts at the world's largest hedge fund Bridgewater (USA) believe that the Fed is seeking to reduce stock prices by another 20%. Their volatility has already risen to a 12-month high. Quotes of these assets are greatly inflated due to constant financial injections.
Nomi Prince, an American journalist who specializes in stock markets, believes that the Fed cannot say how effective their fight against current problems in the economy and financial markets will be. The bank creates a situation of uncertainty at the national level, which can lead to an unpredictable reaction of markets. According to Prince, the head of the Fed may be well aware of the inevitability of the collapse of the stock market in the US presidential election year. Now he is doing everything to prevent a decline. Markets have already hit inflated highs. Problems in the supply chain are gradually being resolved. However, do not forget that supply difficulties existed before the pandemic.
According to experts at one of the world's largest investment banks, Goldman Sachs Group (USA), there are no signs of a bubble in the stock market, and therefore there is no reason to panic. Stock prices are pressured by the companies' mixed financial results for the 4th quarter of last year.
The decline in stock prices will negatively affect the income of ordinary Americans. During the pandemic, American households bought more than $30 trillion in shares. Many took out security loans to fund purchases of new shares. The IMF also predicts a collapse in stock markets as central banks tighten monetary policy to reduce inflation growth. Market sentiment has now deteriorated, according to a survey by the American Association of Individual Investors.
Tightening monetary policy in Europe
The Bank of England decided on a second interest rate increase of 0.25%. Now the aggregate figure is 0.5%. The European Central Bank (the ECB) did not raise the key interest rate. However, Christine Lagarde, the head of the Bank, said the regulator still did not deny the possibility of tightening monetary policy in 2022, as the inflation rate is likely to remain high for a longer period than expected. The ECB's governing council is deeply concerned about this circumstance. In January, consumer prices in the European Union (hereinafter - the EU) rose by 5.1%, which was a record high in the history of the eurozone. Energy prices increased by 28.6%. Experts believe that the increase in the key interest rate will be announced at the March meeting of the ECB. Starting in March 2020, the central bank provided financial support to markets in the amount of about $10 trillion. Therefore, tightening of monetary policy by the ECB cannot be avoided, since inflation must be reined in.
Traders have already included two ECB interest rate hikes in current quotes. Note that earlier experts were sure that the central bank in 2022 will leave rates unchanged. If interest rates are increased, then some EU member states could survive a debt crisis. Investors expect comments from ECB officials on the direction of financial policy. If interest rates remain at 2021 levels in 2022, then inflationary pressure will rise and gold's popularity will increase.
Yellow Metal Market Forecasts
Tightening monetary policy of the world's largest central banks may negatively affect the gold market.
Scotiabank, Canada's third-largest bank by deposits and market capitalization, lowered its outlook for yellow metal for 2022. Its experts estimate the price of gold will hover around the $1,800-an-ounce mark on average. Earlier, it was expected that the average yellow metal exchange rate this year will be $1850. The main reason for the change in the forecast is the expectation of an earlier and multi-stage increase in interest rates. However, bank experts are optimistic about the prospects for the gold market. In their view, the current yellow metal rate forecast is the highest annual average since 1988. Despite the more aggressive monetary policy of the Fed and other central banks, the cost of precious metal should rise amid a number of factors, namely, accelerating inflation, uncertainty in financial markets and the coronavirus pandemic.