Bullion Bulletin: Sliding dollar on hopes of inflation easing

The US Dollar slipped from a 20-year high, falling some 4% against a basket of six other currencies, although it is still up more than 10% since the start of the year. The Dollar spot price for gold responded by gaining 0.6%.

The weakening of the Dollar is due to financial markets taking the view that inflation in the US is easing and therefore interest rates may not go up as rapidly or as high as formerly expected.

All eyes are on 13 December, when the consumer price index (CPI) data will be published. That data will reveal the annualized inflation rate for November; October’s CPI figure was 7.7%, down from 8.2% the previous month. June’s 9.1% figure was the highest (so far) for 2022 but it has crept lower (8.5% in July, 8.3% in August) since then; many are convinced the downward trend will continue.

13 and 14 December also see the next scheduled meeting of the Federal Open Market Committee (FOMC), the body which sets US interest rates. Opinion is sharply divided as to whether the FOMC is more ‘hawkish’ (i.e. is in the frame of mind to raise rates by 0.75%, which would be the fifth successive such rate increase in 2022) or more ‘dovish’ and will be content to raise rates by 0.50%. HSBC has sent its clients a note saying the Fed’s hiking cycle is ending and that “it has peaked”. The Federal funds rate is now between 3.75% and 4%.

The strong Dollar looks as though it will eradicate more than $10 billion from the earnings of US companies in the third quarter. A so-called ‘Fed pivot’ (or change of direction, away from pushing rates up) looks unlikely in December. The Fed wants to ‘cool’ inflation and bring it back to close to its 2%/year target, but various data studied by the Fed are still showing signs of a buoyant US economy; for example US retail sales in October recorded their biggest monthly increase since the start of 2022. The jobs market is close to the tightest it has ever been since records began.

The Fed’s chairman, Jay Powell, said in August that the central bank would “keep at it” (i.e. stick to putting rates up) until it got price pressures under control, but it’s as yet unclear what “it” will require. We may learn a little more from Powell on 30 November, when he is due to speak at the Brookings Institute. So far this year gold has been relatively successful; the S&P500 is down some 17%, the total capitalisation of the cryptocurrency market is down 69%, while the Dollar price of gold is down less than 5%, despite the higher interest rates and the Dollar’s currency strength.

At some point the Fed will perform its ‘pivot’ and start to ease off the interest rate accelerator; as a global recession bites it will find it necessary even to start cutting rates. Investors who opted for cryptocurrency will be thinking twice about the security of the crypto world following the ghastly demise of FTX. Gold is well positioned to benefit from the Fed’s change of heart and the thump to crypto’s solar plexus.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.