As the U.S. dollar approaches its second month in a row of declines, all precious metals position for monthly gains amid the central bank’s monetary policy shifts. With key U.S. inflation reports incoming, the Federal Reserve’s latest comments on potential rate pauses through September seem like a strong reality. Gold is now in shape to achieve its best monthly gain since March, as numerous leading central banks around the globe switch to a more dovish monetary strategy, signifying the end of the year-long rate-hiking cycle around the world.
Gold futures have gained 1.32% in the last month, closing Friday at $1,999.90, following a slight slip on Thursday. With economic growth improving overseas in Europe while inflation eases, the stronger euro and weakened U.S. dollar helped give rise to gold following the momentary dip in prices, according to Carlo Alberto De Casa, a market analyst for Kinesis Money.
Market expectations are pointing at a 2.1% gain in bullion prices this month, the largest performance rate we’ve seen from gold since March. As of right now, the precious metal sits around 1.3%.
With further talk of interest rates finally peaking since they’ve reached the highest they’ve been since the 1980s, a new environment is forming for gold to thrive. Here, the U.S. dollar fails, and the opportunity costs of investing in non-yielding assets are finally reduced.
“We remain in a supportive scenario because there’s a recession risk, and the expectation that central banks are going to be more dovish next year is the main catalyst supporting the price of gold,” De Casa explained.
If central banks cannot pull off a soft economic landing following the end of their tightening cycles and a recessionary period begins, we may see even larger gains from gold. While a recession may seem negative, it offers excellent news for gold investors as more traders flock toward the safe-haven asset. A recession is nowhere near guaranteed at the moment; however, many analysts are predicting a hard landing, at the very least, which would also play in gold’s favor.
In previous recessionary environments, gold gained as much as 80% year-to-date. An interesting connection could be made between our current economic environment and that of the U.S. from 1979 to 1981.
The 1980s was the last time that the Federal Reserve had to raise interest rates higher than they are today. In December of 1980, the Federal Reserve increased rates to 20%, the highest it’s ever been in U.S. history. For reference, in July, the committee raised rates to 5%, still higher than any hike since 1980, though nowhere near that level.
Between the years 1979 and 1980, the recession allowed gold to increase by 19.97%. Just a few years prior, between 1973 and 1975, gold gained 81.8%.
While our current economic environment may not reflect the exact same conditions that were present in the 1970s and ‘80s, a few similarities are clearly present. Interest rates are at an all-time high, the U.S. dollar is falling, and investors are flocking toward gold. The precious metal could be in the same position for an excellent year-to-date gain as a result.
Data released last Friday showed that inflation rates in June increased at the slowest pace in two years. This data only firms the belief that we’re nearing the end of the hiking cycle. If so, this year’s interest-rate tightening cycle will be the shortest one since 1980, marking yet another similarity between our current environment and that of the past.
“Markets feel vindicated with their assessment that Fed rates are at or near their terminal rate, with key inflation reports from the U.S. all pointing towards a faster pace of disinflation,” Matt Simpson, a senior analyst at City Index, explained.
Last Friday, policymakers from European central banks released statements indicating the nearing end of their rate-hiking cycle as well.
“It looks like we are very close to the end of interest rate rises,” Stournaras, the Greek central bank’s governor, explained when discussing the nation’s dovish policy. “In any case, if there is one further (rise) — I see it difficult — in September, I believe we will stop there.”
As we see this dovish shift occur on a global level, all precious metals are gaining momentum, not just gold. Silver’s on a 7.1% gain right now, reaching $24.39 per ounce. Platinum recently increased by 0.2% to $936.95 per ounce, while palladium gained 0.8%, allowing it to reach $1,254.98 per ounce.
As always, investors should consult their advisors before making any portfolio decisions.