The price of gold fell at the fastest pace in the last 20 months in February, as the dollar has started to strengthen again and expectations regarding the Federal Reserve’s interest rate hikes have changed. It is now expected that the central bank will be more aggressive in tightening monetary policy.
The spot price of gold fell 5.2 percent to $1828.4 per ounce in February. In January, gold reached its highest level in eight months, at $1959 per ounce. The last time there was such a large monthly decline was in June 2021, when prices fell by about $130. Gold has slightly increased in early March.
The price of silver fell a total of 11.8 percent to $20.9 per ounce in February. The gold-to-silver ratio has risen to 88 and is trading at historically high levels, indicating silver’s weakness compared to gold.
The gold-to-silver ratio has risen to 88 and is trading at historically high levels, indicating silver’s weakness compared to gold.
Although gold is in a downward trend in the short term, price stabilization is expected in March, as gold has strong support at the $1800 level and there is strong physical demand for the metal.
The price of gold was falling in February after three months of an upward trend. Source: TradingView/Goldprice.org
Inflation was higher than expected at the beginning of the year
In both the US and several parts of Europe, inflation in January was higher than expected, indicating that price growth is more resilient than anticipated, which forces central banks to raise interest rates for longer. This in turn had a negative impact on gold prices in February.
In the US, inflation in January was 6.4 percent on an annual basis, slowing down for the seventh consecutive month. Prices rose 0.5 percent on a monthly basis, and both numbers were higher than expected. Eurozone inflation also exceeded forecasts.
Stronger economic data published recently also favors interest rate hikes – while previously it was thought that there would be an economic downturn this year, at least in the short term, data contradicts this.
Higher inflation has a positive long-term impact on gold, but since it is currently accompanied by interest rate hikes, its effect has been rather negative. Higher interest rates usually also raise bond yields, which increases the alternative cost of gold because it does not pay interest. Alternative cost is the lost income when one investment is chosen over another.
Interest rates will remain high for longer than expected
In January, markets expected the Federal Reserve to start cutting interest rates at the end of this year. Now it is believed that interest rates will remain high for a longer period. In early February, the central bank raised the base interest rate by 0.25 percentage points to a range of 4.5-4.75 percent, the highest level since October 2007.
It was expected that the Federal Reserve would also talk about ending the interest rate hikes. However, there was no such signal. The European Central Bank is expected to raise the base interest rate by 0.50 percentage points to 3.5 percent at its meeting on March 16, according to market estimates.
The dollar index, which measures the performance of the US currency against the six major currencies, has resumed its upward trend after a decline that began in September. The dollar strengthened 3.3 percent in a month. A stronger dollar makes gold more expensive for users of other currencies.
This month has three important events for gold – the European Central Bank’s monetary policy decision, Federal Reserve Chairman Jerome Powell’s speech to Congress, and US inflation figures due on March 14.
Short-term price stabilization can be expected
Gold’s technical outlook and physical demand are strong, which is why price stabilization can be expected after the decline in February. In addition, higher expectations for interest rates have largely already been priced into gold.
The World Gold Council announced at the end of January that physical demand for gold rose to its highest level in 11 years in 2022. This was due to both central banks and retail investors’ active interest in investment gold. Central bank purchases were the largest since 1967. In addition to technical support levels, this offers support for gold in March.
From a technical perspective, the $1800 level is important for gold, where the 200-day moving average also acts as a support level. Gold rebounded from this level at the end of February.
However, if this level is broken, the decline could accelerate significantly. The next strong support level for gold is at $1700, followed by $1615.
The price of gold experienced a sharp decline in February due to various factors such as the strengthening of the dollar, expectation of the Federal Reserve’s aggressive tightening of monetary policy, and higher-than-expected inflation. However, physical demand for gold is strong, and its technical outlook is positive, indicating short-term price stabilization. The $1800 support level is critical for gold, and if it breaks, the decline could accelerate significantly. Nonetheless, long-term inflationary pressures and central bank purchases may provide support for gold in the coming months.