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(Kitco News) — Gold prices fell below $1,800 an ounce after Federal Reserve Chair Jerome Powell signaled that the Federal Reserve is expected to keep interest rates aggressively high into 2023.
However, one market strategist said that rising interest rates will be fewer headwinds for gold as the US dollar benefits less from a tightening Federal Reserve. In an interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said growing fears of a recession are beginning to outweigh the Fed’s aggressive monetary stance.
The comments come a day after the Federal Reserve signaled it was far from done raising interest rates. In its updated economic forecasts, the US Federal Reserve assumes that interest rates will peak in 2023 at 5.1%.
During his press briefing, Powell said the central bank does not anticipate a rate cut at any point next year.
“Powell was categorically clear that interest rates will rise in 2023. We are still in a dangerously high inflation environment,” Milling-Stanley said.
However, Milling-Stanley said the Fed’s forecast and stance could change quickly if the world slides further into a recession. Milling-Stanley said he expects the Federal Reserve to continue raising rates in the first half of the year but will be forced to cut rates by the end of the year or early 2024.
“I think gold will be in a wait and see mode for the first half of the year and that will dampen demand. I see opportunities where it dips past $1,800 an ounce,” he said. “The world is waiting for signs to see what kind of recession we are going to get. And unfortunately they will have to wait a little longer.”
On Wednesday, the Federal Reserve ended 2022 with a 50 basis point hike, pushing interest rates down to 4.5% and marking the most aggressive pace of rate hikes in more than 40 years. Milling-Stanley noted that the US economy has not yet felt the full impact of these rate hikes.
“I don’t think the US economy can avoid slowing growth in 2023 and that will impact US monetary policy,” he said. “If we get a recession, gold will take off.”
Milling-Stanley explained that over the past seven global recessions, gold prices have posted average returns of 20%.
Along with the slowdown in economic activity, Milling-Stanley said inflation remained a significant threat. Earlier this week, the US Department of Labor said its CPI rose 7.1%, falling more than expected. However, Milling-Stanley noted that inflation is still well above the central bank’s target of 2%.
“The risk of inflation is not over yet. I don’t think we’ve seen a peak in wages or service costs,” he said. “Six months ago, an inflation rate of 7% would have been a frightening figure.”
While Milling-Stanley expects gold prices to be relatively stable in the first half of the year, State Street’s official forecast sees a 60% chance of gold trading in a fairly broad range between $1,600 and $1,900 an ounce in the new year.
Looking at the base case, State Street sees a 20% chance that gold prices will fall to $1,500 an ounce if the Federal Reserve can get inflation under control and avoid a recession.
At the same time, she sees a 20% chance that gold prices will return to $2,000 an ounce.
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