Gold begins 2023 on front foot as climax in Fed tightening gets closer

Starting in late 2022, gold futures started an upward trend. This was just as the U.S. dollar started softening in value. While there will be bumps one way or the other, the overall outlook for gold in 2023 is shiny.

Resilience in US labour market limits upside to gold price

The gold price has got off to a strong start in 2023, reaching a six-month high this week, on expectations the US Federal Reserves rate-hiking cycle will reach its peak in coming months.

The spot gold price was at USD 1,850.65 an ounce at 13:51 GMT on Friday, 6 January. This is, close to the highest since mid-August, and up 1.4% on the closing price of USD 1,824.40/oz on the last trading day of 2022. Gold futures rose 1.6% this week to USD 1,842.45/oz on Friday morning in London.

The upside in the gold price is limited by signs that the US labour market remains tight, which is a concern for US monetary policymakers as this may make inflation sticky.

US reports on Thursday, 4 January showed that private payrolls increased more than expected by economists in December and new jobless claims dropped to the lowest since the end of September last week, indicating that the labour market remains tight, which may prompt the Fed to extend its rate increases.

Nonfarm payrolls

The US nonfarm payrolls report, published on Friday, 6 January, confirmed that the labour market remains resilient. The report, on the other hand, showed a moderation in the pace of US wage growth. Gold prices extended their weekly gain after the report was released.

The US economy added 223,000 jobs in December, down from a revised 256,000 jobs created in November, figures from the US Bureau of Labor Statistics showed. Economists had expected job growth of 200,000.

The rate of growth in Average Hourly Earnings, a measure of annual wage inflation, declined to 4.6% in December from 4.8% in November, the report showed, compared with economists consensus expectation of 5%.

Rates above 5%

Traders are now focussing on when and at what level the Fed is going to end its tightening campaign. The Fed raised US rates seven times in 2022 to a range of between 4.25% and 4.50%, from a range of 0% to 0.25% at the start of the year. Higher rates reduce the appeal of gold, which pays no yield, compared with interest-bearing instruments, such as the US dollar or government bonds.

The Fed slowed the pace of its rate increases to a less steep 50 basis points hike in December, after four consecutive 75-basis-point steps. Markets expect it to deliver at least one more 50 basis point rate increase in February, lifting the rates above 5%.

Fed policymakers this week reiterated their commitment to raising rates until inflation is on “a sustained downward path.”

Disinflationary year'

However, St. Louis Fed President Jim Bullard said in a 5 January speech that 2023 may shape up to be a “disinflationary year,” due to the front-loaded rate increases and falling inflation expectations.

While the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer, Bullard said.

The US dollar pared its weekly advance after the nonfarm payrolls report. The dollar index (DXY) traded at 104.99 on Friday afternoon in London and was on course for a 1.4% weekly gain. The dollar index tracks the value of the greenback against six of its major counterparts. A weaker US dollar makes gold contracts, which are priced in the US currency, cheaper in other currencies.