Gold prices are inching higher as bond yields decline, allowing the precious metal to reaffirm its recent gains. With more U.S. economic data due soon, analysts are watching closely to see how the information will affect the current interest rate outlook. The latest set of data solidified the viewpoint that the Fed would not raise rates this month, though what will happen in November and onward is still highly up for debate.
Spot gold last increased by 0.3% to $1,922.70 per ounce. The precious metal may have hit a one-week low on Wednesday, but now, it’s firmly maintaining critical lines above the psychological $1,900 level. U.S. gold futures also increased by 0.1% to $1,946.80 per ounce.
“Quite clearly, we’ve seen a reversal in U.S. economic data from weakness to strength recently, and that once again added to expectation that the Federal Reserve may not yet be done hiking rates,” Ole Hansen, the head of commodity strategy at Saxo Bank, weighed in.
Hansen is referring to the recent job data and consumer spending figures that came through last week, revealing shockingly high consumer spending rates considering the still-high inflation levels.
When interest rates drop too low for the Fed’s preferences, the economy can spiral into sudden growth spurts that are unsustainable and short-lived. In such periods of too much growth without enough purchasing power, the Federal Reserve often chooses to raise rates again to slow economic growth to a more sustainable level.
Hansen believes the latest set of U.S. data may be hinting at an economy growing too fast, potentially requiring another rate hike to curb growth. How the Fed will view these data points is still unclear. Economic growth isn’t always a bad thing; the Fed may also see positive figures as beginning signs of a soft landing.
“In addition, the dollar has reached fresh six-month highs… Gold continues to be very data-dependent, we have initial jobless claims later in the day, but the significant one will be CPI (consumer price index) data due next week,” Hansen continued.
The U.S. dollar continues to hold steady after reaching its highest price point since March of this year. The stronger-than-expected service sector figures from the U.S. last week boosted the asset. At the same time, ten-year Treasury yields fell from a two-week high.
On Wednesday, Susan Collins, the Boston Fed President, warned central banks to proceed cautiously when defining their upcoming monetary policies.
“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,” Collins explained. “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.”
While Collins acknowledged the recent figures showing cooling inflation, she does not believe the fight against the climbing rates is over quite yet. Collings stated that achieving the 2% target will take “time to ensure that the economy is on a clear trajectory to achieve price stability.”
With that being said, most are still expecting a rate pause in September. According to CME’s FedWatch Tool, the likelihood of rates staying the same after September’s FOMC gatherings is 93%. This high percentage is likely the reason behind gold’s recent gains.
Gold prices have an inverse relationship with interest rates. High rates increase the opportunity costs of investing in non-yielding assets, like bullion. As rates currently sit at the highest point they’ve been in 40 years, gold faces enormous headwinds.
With the marketplace expecting a rate pause in September, gold prices can enjoy a break from the climbing rates. The high likelihood of a rate pause in September is allowing gold to regain its footing ahead of September’s meeting.
Whether the Fed will continue pausing rates in November or beginning cutting or hiking is still unclear. According to the Federal Reserve’s “Beige Book” released on Wednesday, the economy’s health in recent weeks shows “modest” growth, which may be good news for gold.
“Modest” growth should not signal concern of an overcorrection nor severe inflation requiring higher rates. Of course, this can quickly change once the U.S. initial jobless claims data comes in. Until September’s meeting, traders can continue assessing the incoming data to predict how the Fed may respond.
As always, investors should consult their financial advisors for portfolio support.