Gold carries a long-earned esteem for its safe-haven secure status, and it clearly proved itself yet again last week after holding strong despite numerous factors that should have dragged it down. The shiny precious metal briefly dipped below what many see as a critical line of $1,900 per ounce, only causing it to quickly gain traction as investors bought into the low prices. The dip in prices came from strong U.S. economic readings, showing positive figures for the first time in about 20 months.
Following its brief nudge below $1,900, gold quickly increased by 0.1% to $1,908.4 per ounce by mid-afternoon on Thursday. The price dip to below $1,900 marked gold’s first settlement of this kind since the middle of March when the U.S. dollar index increased by 0.4%, making precious metals a second-choice option for many investors. Luckily, low prices always ignite “bargain hunting” among investors, allowing the dips to be short-lived, according to David Meger, the director of metals trading at High Ridge Futures.
“We’ve seen prices move down from $2,000 to $1,900, and that in itself is going to bring about some bargain hunting,” Meger explained.
Last week, the U.S. jobless claims data dropped for the first time in nearly 20 months. This signal of labor market strength also gave rise to gross domestic product from the first quarter. Both of these factors contributed to gold’s temporary lull, as investors felt comfortable branching out to riskier asset classes for one of the first times this year.
“It was a one-two punch taking gold another leg lower … and then the hawkish central banks haven’t helped out at all,” Phillip Streible, the chief market strategist at Blue Line Futures in Chicago, explained.
Jerome Powell, a chairman of the Federal Reserve, explained that many central bank policymakers, including himself, believe they must hike interest rates at least two more times by the end of 2023. The nation’s current inflation rate is still significantly above the 2% goal set by the Federal Reserve. While the one figure from last week’s U.S. job report may seem strong, the overwhelming information still points toward a tight labor market, also supporting Powell’s forecast on further rate tightening cycles.
While central bank policies may not be favoring gold’s performance, their actions say otherwise. Central bank gold purchases around the gold continue to meet last year’s record-breaking levels that set the gold industry on fire.
For example, Poland’s central bank purchased 19 tons of gold in May after stockpiling 15 tons the month prior. These purchases came after a lull period, allowing Poland to achieve record gold levels of 263 tons. Based on previous statements given by the central bank’s president, Poland may be on track to purchase 100 tons total in the next few months.
Poland is just one prime example of nations building their gold reserves, providing critical support to the gold market amid the rising interest rates and volatile market concerns. “With interest rates around the world moving higher, we are going to see a lot more volatility in foreign exchange markets,” Tavi Costa, a portfolio manager at Crescat Capital, explained. “In this environment, central banks will need to enhance their reserves over time by owning more precious metals.”
Still, it’s not unusual to see gold’s rates humbled by rising interest rates, considering the precious metals use case as an inflation hedge. Current market expectations believe interest rates may finally reach an eased negative level by the end of this quarter for the first time since September of last year.
Expectations don’t mean anything until we see the policies play out, though. The personal consumption data for May just came out last Friday, which should significantly sway the Federal Reserve’s decision as the central bank tends to use these figures as its favored inflation gauge.
Key highlights from the data showed that personal income increased by $91.2 billion, the personal consumption price index rose to the expected 0.3% and personal spending slightly edged up by 0.1%. All of these figures indicate positive market conditions, though all we can do now is await the Fed’s decision.
Gold prices increased following the release of the personal consumption data. Prices rose from $1,917.90 per ounce on Thursday to $1,929.40 on Friday. If the trend continues, we may see more investors quickly hopping on the precious metal before it skyrockets above $2,000 per ounce again. As always, investors should consult their financial advisors before making any portfolio decisions.
