The markets were deceived about the upcoming Federal Reserve decision.. So what does this mean for gold?

The US PMI Composite Production Index came in at 46.6 in January, up from 45.0 in December. This means that the decline in business activity eased to the slowest in three months. But it was another decline, as every number below 50 means a decline in economic output. The main drivers of deflation were the impact of higher interest rates, uncertainty, and higher inflation on consumer spending.

The service business activity index in the US came in at 46.6 in January, up from 44.7 at the end of 2022. The services sector thus experienced another strong decline, although it was at its weakest level since last October. The US Global Manufacturing Purchasing Managers’ Index rose slightly from 46.2 in December to 46.8 in January, but it was still the second-fastest drop since May 2020.

The good news is that the numbers exceeded expectations. The bad news is that input inflation has bounced back. It also accelerated from December, ending seven months of moderate cost pressure.

US PMI and the US Federal Reserve

Although the January data came in above expectations, it showed that contractions in the private sector continued into the new year. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, also commented:

The US economy started 2023 on a disappointingly soft note, with business activity contracting sharply again in January. Although moderate compared to December, the rate of decline was among the sharpest since the global financial crisis, reflecting a decline in activity in both manufacturing and services.

What is disingenuous about the report, however, is the flavor of stagflation, that is, an indication of a weak economy and rising inflationary pressure. As Williamson said:

“What is troubling is that not only did the survey point to a slump in economic activity at the start of the year, but that the rate of input cost inflation has accelerated in the new year, linked in part to upward wage pressures, which could encourage more aggressive Fed tightening despite High risk of recession.

Indeed! Although a 25bps hike in February seems already set in stone, it could provide more gains than currently expected. I wouldn’t be surprised if the dovish measures at the upcoming FOMC meeting are accompanied by hawkish signals. Given that a small move (well, before 2022, it was a record size hike) has already been priced in, any hawkish evidence would be detrimental to gold prices.

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Implications for gold

What does all this mean for the gold (and silver) outlook for 2023? Well, as the chart below shows (courtesy of, it’s been up lately. The upward move was driven by hopes of a more dovish monetary policy and, eventually, a policy shift by the Fed. Thus, any surprise from the hardliners could lead to a decline.

However, it is too early to announce the return of inflation. It was only one month of acceleration in input costs, and it did not translate into higher output prices. Hence, I think a cautious outlook is more likely, especially since the hardliners do not vote in 2023 (due to rotation within the FOMC members, Bullard, Mister and George out this year).

To be clear, in a stagflationary environment, monetary policy will fluctuate from dovish to hawkish, and gold prices will react accordingly. However, the weaker economy should prompt the Fed to adopt a more dovish stance in the coming months, which should act as a tailwind for gold.

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