Weekly Market Update – Week Ending 13/01/2023

For investors, the main focus of attention this week was on the December US inflation data, due Thursday.

With markets in a more optimistic mood since mid-December, there was a collective sigh of relief when the data showed a sixth straight monthly decline in inflation to 6.5% year-on-year. Having been 7.1% in November, the sharp drop in energy prices was the main driver behind the fall and helped lift pressure on US household budgets in the face of a rising cost of living.

The Federal Reserve will scrutinise the overall composition of the figure before their next meeting on the 31st January. After one of the steepest rate-hiking cycles in history, the committee opted to slow the pace to 50 basis points (bps) in December. The expectation is that this will be slowed further to a 25bp rise at the upcoming meeting.

One of the winners over the last few months from the lowering of interest rate expectations has been gold. Gold pays no interest, unlike a bond, for example, which pays a regular coupon in most cases. This means that as the expectations for the risk-free rate decrease, the opportunity cost of holding the asset falls. With inflation at an elevated level and in conjunction with interest rate expectations falling, this has provided something of a goldilocks environment for the yellow metal. Having traded around $1,620 an ounce in September, gold reached $1,890 on Thursday, an increase of roughly 16% over the short period.

As a result, gold miners could be well placed to benefit on two fronts. They should be able to gain from achieving a higher price on the gold produced and also a reduction in their input costs as a result of the fall in the oil price in recent months.

John Naylor, Chartered FCSI – Head of Investment Committee