Gold Holds Steady Against Rise in Dollar and Yields

Investor sentiment continues to lag gold prices as the U.S. Treasury yields and U.S. dollar rises. With new data from July coming in each week, all talk is on the upcoming Federal Reserve meeting and whether a rate hike will occur. Gold may be lagging in the meantime, though the precious metal could gain momentum as the meeting nears and more anticipate the likely rate pause.

Gold futures increased Friday from $1,915 per ounce to $1,918 per ounce, firming performance rates above critical lines. While gold may have seen alarming lows in recent weeks, many investors are using these prices as opportunities to strike before prices jump again.

The current low prices do not display unpredictable volatility but rather the opposite. Gold’s responding to the market in the exact way it always does.

Gold prices dip when interest rates peak. Gold also weakens with strong bond yields. Right now, both of those factors are high, pushing gold prices down.

“Gold has been down over the course of the last several sessions due to rising interest rates and bond yields,” David Meger, the director of metals trading at High Ridge Futures, explained. “We did see a bit of bargain-hunting at these levels.”

The good news is interest rates can’t stay high forever. The current interest rate is the highest it’s been in over 40 years. The Federal Reserve does not have much more wiggle room for another hike.

Aside from how high the rates are, the economy is responding well. According to the latest CPI data from July, inflation is cooling, and consumer prices are increasing at decelerated rates.

According to CME’s FedWatch Tool, there’s under a 9% chance of a rate hike in September. The likelihood of a pause is over 90%.

Gold’s largest headwind at this point is how long the current rates will need to stay. Some argue that the current rate will remain for a few months, while others foresee it staying well into 2024.

July’s FOMC meeting minutes shed a bit of clarity regarding the committee’s opinions on this matter. The members displayed their firm stance on achieving the targeted 2% inflation level. The current inflation rate sits well above this line at 3.2%.

“All members affirmed that they are strongly committed to returning inflation to their 2 percent objective,” July’s FOMC meeting minutes stated.

Most policymakers seemed to agree during July’s meeting that the battle against inflation should be the top priority. The minutes did state, however, that the committee understood the risks of raising rates too high. The minutes went as far as to say that the committee would “be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

With that being said, the marketplace largely took the minutes release, which came out on August 16, as a hawkish stance from the Fed. The latest information ignited more investor fear over how long interest rates may stay high or if another hike could occur.

“We noticed yesterday in response to the FOMC minutes the market portended that the Federal Reserve still might need to be a bit more aggressive than previously expected in regards to continuing to raise rates,” Meger continued.

The initial market response to the meeting minutes spiked ten-year U.S. Treasury yields, pushing the commodity to its highest price point since last October and making gold less attractive to investors. At the same time, the U.S. dollar managed to maintain its highest price point in the last two months.

As we approach the September Federal Reserve meeting, gold may face more headwinds or gain more traction, depending on how the data unfolds. Any hints of a tight labor market may bode well for the commodity, as tight labor conditions often discourage the Fed from rate hikes.

“Markets are looking for cracks in the U.S. labor market to really change the current trajectory, and until such time, bullion may remain under pressure,” Warren Venketas, an analyst at DailyFX, explained.

With this in mind, the latest unemployment report showed positive news for gold. The number of new unemployment claims dropped last week, showing persistent tightness in the labor market.

In other news, silver achieved its biggest daily gain since the end of July, with a 1.1% increase to $22.64 per ounce. Platinum also rose by an impressive 1% to $890.81 per ounce, and palladium crept up 0.4% to $1,213.76 per ounce.

As always, investors should consult their financial advisors before making any portfolio decisions.

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