Gold Under Pressure as Rate Hike Bets Rise

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In the realm of financial markets, the recent release of the Federal Reserve's minutes from its June meeting has sparked significant interestThe document reveals a consensus among nearly all committee members on the necessity of continuing interest rate hikes in forthcoming meetings, albeit at a more measured paceThis hawkish tone has led to a surge in the probability of a rate increase in July, reaching nearly 90%. As a ripple effect, bond yields in the U.Shave climbed alongside the dollar index, resulting in a retreat of gold prices down to approximately $1,915 as of July 7.

Gold has undoubtedly captured attention over the past year, witnessing an impressive ascent from around $1,600 per ounce to over $2,000. Notably, in early May, it even eclipsed its historical peak at $2,085. However, with the recent resurgence in the dollar index and heightened expectations for Fed rate hikes, gold has faced a correction exceeding $150, settling around the $1,900 mark

Analysts remain optimistic about gold's long-term bullish trend, yet anticipate a period of consolidation and restraint in the medium term.

Gold Faces Range-Bound Consolidation

Throughout the first half of the year, gold prices escalated by 5%, distinguishing it as one of the few commodities recording gainsThe shift in momentum, however, has led to the formation of a triple top pattern in the weekly charts, signaling a waning ability among bulls to further elevate the price in the short term.

Looking ahead, while the overarching trend for gold remains bullish, it seems poised to undergo a volatility phase in the interimThis anticipation is fueled by the fact that major central banks, spearheaded by the Federal Reserve, are nearing the end of their rate-hiking cycle, yet the end of this cycle does not necessarily herald a decrease in rates

Instead, a prolonged period of high rates may be on the horizon, a scenario that gold bulls would embrace.

Further complicating the outlook is the spectacle of the so-called 'economic recession' that has been a hot topic over the past yearWhat initially threatened to become a storm appears to have passed quietly, with the banking crisis in March seemingly sidestepped and geopolitical tensions hinting at thawing dialoguesAs a result, the traditional safe-haven appeal for gold has diminished.

A pivotal issue lies in the Federal Reserve's cautious stance towards persistent high inflation levelsIt is predicted that there could be one or two more rate hikes in the calendar year, which would likely negatively impact the relative value of non-yield-bearing assets such as gold

This creates an intricate dance, whereby the performance of gold is tightly intertwined with interest rate trajectories.

According to a recent report by the Bank for International Settlements (BIS), despite inflation subsiding from multi-decade highs, the work for central banks is far from finishedThe report highlights that while the recent tightening of monetary policy has been the most aggressive in recent memory, the final stretch towards restoring price stability is fraught with challengesMuch of the progress against inflation thus far has been attributed to easing supply chain constraints and declines in commodity prices, yet the labor market continues to exhibit strains, making service price growth difficult to controlThere remains a risk that inflation expectations could take hold, causing wages and prices to escalate in a self-reinforcing loop

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This scenario suggests that interest rates may need to remain elevated for longer than previously anticipated.

Gold's Potential Surge Linked to Rate Cut Predictions

When considering the timeline for gold's resurgence, experts suggest that a potential breakout may occur when market sentiment shifts towards expectations of interest rate cuts, projected to begin in the first quarter of 2024. Historical patterns, particularly from the transitions between rate hike and cut cycles witnessed in the years of 2007 and 2019, reveal that gold prices typically begin to show signs of life during these pivotal periods, often leading up to new bull markets.

In those past cycles, gold ultimately reached record highs, establishing a precedent that suggests if history were to repeat itself, another peak is nearly inevitable

Additionally, unforeseen 'black swan' events hold the potential to trigger a sudden surge in demand for gold, with central banks' sustained enthusiasm for the metal consistently providing further support for its price.

In the immediate term, price levels around $1,892 to $1,900 can be viewed as a temporary support floor for goldHowever, for prices to ascend to higher peaks, a corrective move to deeper levels might be necessary to consolidate more buying power and gather momentumKey resistance levels to watch on the upside would be $1,940 and $1,980.

In the Midst of a Rate-Hiking Pause

Historical Performance Shows Average Monthly Return of 0.7%

As the global narrative of economic growth evolves, concerns about recession linger

The diversification of central bank gold purchasing strategies is on the rise, suggesting long-term opportunities for gold investments are unwaveringRecent rate hikes by both the European Central Bank and the Bank of England have added complexity to the economic landscapeIn the United States, the Federal Reserve chose to hold the target rate steady, with the next potential hike likely occurring in July, after which the rates are expected to stabilize.

Despite speculation about further rate increases from the ECB and the Bank of England, market sentiment leans towards an imminent end to the tightening cycle, potentially culminating before year-endThis paradigm shift in monetary policy could signify a gradual transition from 'tightening' to a 'rate pause,' fueling expectations of mild recessions in the U.Seconomy this year, while growth in developed economies may slow.

The World Gold Council has also suggested that should these forecasts hold, gold could continue to gain traction in the latter half of 2023, particularly in light of its robust performance in the first half of the year

However, substantial upward movement beyond the prevailing volatility ranges appears unlikely, driven by four crucial factors affecting gold's performance: risks of economic expansion, opportunity costs, and market momentum.

Potential sluggish growth in Western economies may cast a shadow over gold consumption; however, the World Gold Council anticipates stronger performance from the Indian economy, with China's economy poised to respond favorably to potential stimulus measures later this year, consequently bolstering demandMeanwhile, despite indications that inflation is cooling, resurgent stock market volatility paired with 'event risks' such as geopolitical tensions or financial crises could prompt continued hedging strategies among investors, including gold.

Market insights suggest that should interest rates slightly decline and the dollar weaken, the resultant decrease in opportunity costs for investors could pave the way for rising gold prices

Interestingly, the preceding three rate pause cycles have enjoyed average monthly returns of approximately 0.7%, translating to an impressive annualized return of 8.4%, outpacing long-term averages.

Additionally, a noteworthy statistic from 2022 indicates that global central banks acquired 1,136 tons of gold—a historic record—which shows no signs of abating in 2023. Monetary authorities across nations, including the Monetary Authority of Singapore, Turkey's Central Bank, and the Reserve Bank of India, continue to add gold to their reservesAn extensive survey conducted during the first half of last year among over 50 central banks revealed factors like 'performance during crises,' 'inflation hedging,' and 'long-term asset preservation' as primary motivators for gold holdingsIn this survey, 61% of responding central banks anticipate increasing their gold reserves in the next twelve months.

(The views expressed in this article represent the author's personal opinions

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