Anyone with eyes on the gold market lately knows that prices have been relatively volatile. This volatility is nothing shocking, though, considering the key factors at play. Between the rising interest rates hitting peak 40-year levels and the U.S. dollar climbing to unforeseen highs, the precious metal’s ability to maintain solid ground despite the headwinds proves its safe-haven status.
At the start of 2022, the U.S. dollar plummeted by approximately 99 points. After reaching that low, the asset began an upward trend that allowed it to achieve a record high above 114 points at the end of September 2022. The U.S. dollar traded beneath this high for the following ten months up until July 18, 2023, when it hit its low of 99.14.
July 18 marked the end of the U.S. dollar’s price correction period. Since then, the asset began rallying again. As of last Friday, the asset rose 0.24% to 104.699.
Gold has an inverse relationship with the U.S. dollar. When the dollar value drops, gold rises. With the dollar on the rise, gold has become more expensive for investors of other currencies.
With that being said, gold is also on the rise despite the dollar’s recent strengths. The expectations over a rate pause from the Fed have given the commodity excellent momentum in recent weeks. Gold’s current largest hurdle is dollar prices.
Gold futures closed Friday at $1,942.70 per ounce, marking a minimal daily rise. However, if the dollar had maintained value rather than risen, we might have seen more substantial gains. If the dollar increased by 0.24% and gold lost 0.03%, then it makes sense to argue that gold could have gained 0.21% had the dollar remained neutral.
As of Friday, spot gold was up $2.50 per ounce, holding key levels at $1,918.30. Considering the dollar’s recent strength, this gain is rather impressive.
Markets are currently considering gold to be in a short-term corrective cycle following the high hit on September 1 of $1979.69 per ounce. The high’s rally began on August 17, when gold hit $1916.40 per ounce before climbing to the figure mentioned above. The short-term corrective cycle will likely bring gold down just a bit before it rallies up again, likely in response to the next Fed gathering.
The next Federal Reserve meeting will take place on September 19 and 20. Most are currently expecting a rate pause from the Fed, which would bode well for gold.
Gold has an inverse relationship with interest rates like it does with the U.S. dollar. When interest rates are high, like they have been lately, gold struggles to perform at peak rates. High interest rates increase the opportunity costs of investing in non-yielding assets, like gold.
With most expecting a rate pause this meeting, gold should gain some support from investors. The pause may also mark the end of the rate-hiking cycle, depending on how committee members respond to the incoming data. Any hints of future rate cuts would likely allow gold to rally further.
Based on CME’s FedWatch Tool, the current likelihood of a rate pause in September is 93%. In November, the market is betting on a 56.5% likelihood of a rate pause. By January, we see our first chance of a rate cut at 8.1%, with the odds increasing significantly by May to over 44%.
The Federal Reserve’s monetary policy seems to be providing critical support to gold prices right now as the U.S. dollar pressures gains. The precious metal continues maintaining prices above critical $1,900-per-ounce lines based on investors’ hope of the interest-rate cycle ending soon, despite the U.S. dollar’s strength.
When the U.S. dollar will peak and begin falling again or when the Fed will begin cutting interest rates is still unclear. Both events will likely mark excellent performance rallies for gold.
“The risk of inflation staying higher for longer must now be weighed against the risk that an overly restrictive stance of monetary policy will lead to a greater slowdown in activity than is needed to restore price stability,” Federal Reserve Bank of Boston President Susan Collins stated when addressing her stance on the monetary policy. “This context calls for a patient and careful, but deliberate, approach to policy, allowing time to assess the effects of policy actions to date, and then acting appropriately.”
Moving forward, traders can continue assessing U.S. dollar performance rates and Fed statements to evaluate gold responses. As always, investors should consult their financial advisors before making any portfolio decisions.