The gold market simply cannot get rid of the fact that the US central bank is trying to raise interest rates earlier than agreed, even if the first rate increase will occur no earlier than in a couple of years. Last week, US bond yields declined to the lowest level. This should add to the optimism for investors in gold, since the precious metal has not been able to rise much above the $ 1,800 level.
This data was not enough for gold's bullish traders. The market has dealt another monetary policy blow, as the gap between the Federal Reserve System and the European Central Bank is currently growing.
Last week, the ECB said that it is not going to raise interest rates until the inflation rate reaches 2%. These are powerful words that mean that interest rates in Europe will remain low for a very long time.
The Federal Reserve system looks more aggressive compared to the ECB. The Committee continues to talk about reducing its monthly bond purchase program. This growing monetary policy gap is provoking the US dollar, creating favorable conditions for gold.
Despite the fact that the Fed is going to reduce its monthly bond purchases by the end of the year, they will do it slowly. Currently, the central bank is buying $ 120 billion worth of bonds. They bought $ 85 billion during the worst financial crisis of 2008. Thus, the reduction in purchases means that the Fed will simply return to the state in which it was less than a decade ago.
In a recent commentary, Joe Foster, portfolio manager for precious metals at VanEck, argued that given the growing inflationary threat, a rate hike in 2023 may be too insignificant for the Fed.
Central banks are also returning to the gold market. According to reports, the Central Bank of Brazil has increased its gold reserves by more than 50%, purchasing 41.8 tons of gold just over the past few months. At present, the precious metal accounts for 1.9% of its total foreign exchange reserves compared to the previous indicator of 1.2%.