As the liquidity flood recedes, can gold prices bear the heavy pressure?

Recently, the international gold price has continued to be under pressure, and the market is worried that the potential upward trend of inflation in the United States is still rising. The Biden administration reiterated that reducing inflation "is the government's top economic task". Investors expect the Federal Reserve to strengthen its hawkish signal. The short-term performance is sluggish.

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The Russian-Ukrainian war caused gasoline prices to soar in China, which also pushed up global commodity prices. But before the outbreak of the war on February 24, inflation had become a stubborn disease of the global economy, as governments around the world injected large amounts of relief funds into the economy during the epidemic, and a large number of laborers left the job market. As the economy recovered, bottlenecks in the global supply chain became more and more obvious. .

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Gold, a non-yielding asset, is sensitive to rising U.S. interest rates. The U.S. Federal Reserve raised interest rates by 50 basis points last week, the largest single rate hike in nearly 22 years, as it tightened its ultra-loose monetary policy during the pandemic. It's "encouraging," as President Biden went in to say, to see a slowdown in the annual numbers, but "the reality remains that inflation is unacceptably high." It's all a challenge to say, and bringing it down is my top economic priority.

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The higher-than-expected inflation has damaged the Fed's credibility again and may prompt it to reassess inflation trends. The Fed may still raise interest rates by 50 basis points in June, but the pace of rate hikes in July and beyond will need to be reassessed based on the latest situation.

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After U.S. inflation remained at a multi-decade high, the Fed had to abandon their "temporary" argument and turn to a months-long battle against inflation. However, the truth is that they may have turned this war into a "protracted war" under the vision of a "soft landing" that wants to maintain economic growth and control inflation.

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Historically, the real interest rate on U.S. Treasury bonds has a near-perfect negative correlation with the price of gold. However this relationship has been broken since early March, why has gold ignored the rise in real interest rates?

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Since February this year, multiple macro events such as the geopolitical crisis and the Fed's interest rate hike have been superimposed, making gold face a more complex political and economic environment than before. "De-dollarization", inflation expectations, etc., affect the price of gold from different directions, and also make the price trend of gold deviate from the traditional real interest rate pricing framework for US bonds to a certain extent.

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In fact, there are many factors that affect the price of gold, and people have established analytical frameworks from different perspectives. For example, starting from the monetary, financial and commodity attributes of gold, the factors that affect the price of gold are divided into six major aspects, namely the US dollar index. , risk events, real interest rates, inflation levels, gold supply, and gold demand, and the actual driving factors behind these six factors are closely related to the U.S. economy, real interest rates, and changes in central bank buying/selling behavior.

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When inflation expectations are at a high level and the interest rate curve is flat or even inverted, the price of gold tends to be strong. In a state of economic stagflation, gold tends to gain the favor of more allocation funds. But the most important thing in this year's gold price action is resilience to expected market volatility. As a special commodity, gold has the dual attributes of a risk asset and a safe-haven asset. As the Federal Reserve starts the interest rate hike cycle, the impact of interest rates on the price of risky assets begins to appear, and the demand for safe-haven also supports the price. During the price movement, the market entered a low-volatility pattern and speculative positions began to decline.

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Data released during the week showed that the number of Americans filing for unemployment benefits for the week ending May 7 was 203,000, the highest since the week ending February 12, 2022. The number of Americans filing for unemployment benefits unexpectedly rose last week, but labor market conditions did not materially change: Demand for workers remains strong and shortages are acute.

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Initial jobless claims have stalled since hitting a more than 53-year low of 166,000 in March. Economists blamed volatility around holidays such as Easter, Passover and school spring break for the second straight week of increases. Tight labor market conditions are pushing up wages, keeping inflation unsustainably high.

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The U.S. April PPI monthly rate announced on the same day recorded 0.5%, the smallest increase since September 2021; the annual rate was 11%, higher than the expected 10.7%. The U.S. PPI rose more than expected in April, suggesting that the rise in consumer inflation may persist for longer than expected, prompting the Federal Reserve to move toward aggressive interest rate hikes. Persistent inflation on the production side will continue to affect consumer prices.

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Consumer prices rose more than expected in April, driven by categories such as housing, food, airline tickets and new cars. With factors such as the Russia-Ukraine conflict further straining supply chains, producers are likely to continue to face higher costs, increasing the likelihood that they will pass those costs on to consumers. After the data was released, the dollar continued to rise and refreshed the daily high to 104.94, up more than 100 points from the daily low, and closed at 104.76 in late trading. The safe-haven dollar climbed to a 20-year high, making gold less attractive to holders of other currencies. Investors worry that tightening monetary policy to curb inflation will hurt the global economy.

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Although gold is seen as a hedge against inflation and a safe-haven bet during economic and political turmoil, it is highly sensitive to rising U.S. interest rates, which has contributed to its recent sharp decline.