Great start to the year

The Dollar gold price ended the first quarter of the year up 9% since the year began, and by $150/ounce in March, its best month since July 2020 and the best quarterly performance since Q2 2020. What’s behind this remarkable rise?

The rise in US interest rates, which have risen from close to zero a year ago to 4.75%-5% now, in theory should have deterred the higher gold price. Higher interest rates make the fixed return of government bonds less appealing to investors. Yet higher interest rates can also strengthen a currency. In 2022, the Dollar rose to new 20-year highs; in 2023 inflation and interest rate expectations have been very volatile and the Dollar has too. Until the recent worries over the stability of US banks the Dollar was on a roll but the bank anxiety triggered a sharp reversal. Nevertheless the Dollar is still relatively strong. The US Dollar Index, an index of value against a basket of six foreign currencies, is up almost 7% from a year ago. The Dollar has appreciated in line with higher interest rates – the more demand there is for the Dollar from international investors seeking yield.

What is fascinating right now though is the question – how much more is the US Federal Reserve prepared to/able to raise interest rates? If the gold price has strengthened so much while in a period of rising interest rates, which mitigate against gold’s Dollar price rise, it will surely rise even higher once the Fed signals an end to rising interest rates and possibly a cut in those rates?

Behind the chatter about interest rates and how soon the Fed might/might not stop putting them up, i.e. how confident it feels that inflation is ‘beaten’, there are noises that deeply disturb investors. One such came from Ken Griffin, founder and majority owner of the chunky hedge fund Citadel, which has about $54 billion assets under management. Griffin’s comment on the US government’s rescue of all depositors in the failed SVB bank was that American capitalism is “breaking down before our eyes”. Griffin regarded the rescue as a “loss of financial discipline”, a view not shared by all.

The demise of SVB, together with the forced takeover by UBS of Discredited Suisse has spurred thoughts that the current round of interest rate rises might be coming to an end; the risk of higher rates adding to financial instability is too great, some fear. Yet others suggest that the US economy is doing so well it can stomach a rise to a 5.5% interest rate without inducing a recession. Opinion is sharply divided.

“Given recent events, we think there’s a chance that Gold prices will reach our end-March 2024 target of $2,100 earlier than expected. While a repeat of the global financial crisis appears to have been averted, we think it will take time for investor confidence to be fully restored”. So says the Swiss bank UBS.

UBS is not the only one to be more bullish. Despite the shift higher in interest rates, and starting to revise upwards their price forecasts for gold. Given the terrific start to the year that gold has had, in the face of higher interest rates and the consequent stronger Dollar, any reversal of the Federal Reserve’s anti-inflation policy ought to give gold an extra lift.

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.