Gold Prices Climb as the U.S. Dollar Weakens

Analysts expect to see a third consecutive rise in gold prices coming soon after the recent dip throughout February. Last month, gold dropped by $155 from unsteady Federal Reserve actions, though as the U.S. dollar falls, gold should see rebounding results. U.S. treasury yields and gold prices typically show inverse trends, depicting high gold prices with high inflation rates, and reduced gold buying with successful economic performance levels.

“We’re due for a bigger correction here,” Daniel Pavilonis, a senior market strategist for RJO Futures, explains. “We’ve seen a sharp selloff in ten-year yields from just shy of 4% down to 3%. At the same time, we’ve seen a sharp rally in the metals. I just think we’re going to see a retracement of that rally… gold could sell off maybe $150 from here and again become a buying opportunity.”

While the U.S. treasury yields haven’t dropped yet, gold prices have already begun climbing. This uncommon reaction may be due to a distrust in the Federal Reserve’s confidence. Many investors, global central banks, and large industry players have developed a sense of fear regarding the U.S. dollar’s strength, learning not to trust a temporary move in the positive direction for too long.

“The gold market seems to have an element of traders and investors hearing what they want to hear rather than what is actually said as, despite the Fed Chair saying on Tuesday that further interest rate hikes are needed to fully curb inflation, his tone was interpreted as less aggressive than previous and therefore reason for gold to gain,” Rupert Bowling, Kinesis Money’s market analyst, explains.

As gold reaches impressive highs with short-lived dips responding to Federal Reserve actions, it’s clear that investors don’t truly know how to respond to our current economic state.

Will there be a recession? Will the economy be restored? No one has a clear answer.

Investors have developed a level of distrust in the Federal chairman, Jerome Powell, who “actually stimulated a bumpy ride for the dollar index,” according to a chief market analyst at AvaTrade, Naeem Aslam. Powell’s bold plans to hike interest rates early this year as a means of controlling inflation sparked the initial fall in gold prices, though investors are now retracing their steps.

The World Gold Council predicts three potential playouts in the coming year. The first two scenarios involve nationwide or global recessions, while the final plot displays economic restoration, steadying gold prices. While gold prices would soar with a recession from investor demand, its performance would still steady out without a recession from the other demand sectors.

50% of gold’s demand comes from the jewelry industry. Jewelry demand typically falls during recession periods as buyers hesitate to spend money on lavish purchases. Conversely, if the economy improves and people find themselves with extra spending money, we could see an uprise in jewelry demand, allowing gold prices to rise with the U.S. dollar, a unique anomaly.

Another demand sector that rises with a successful economy is industrial and electronics companies. Gold is a highly sought-after material for electronic conductors because of its low reactivity to various substances, making it corrosion-resistant. As smart technology and electric vehicles gain popularity, especially with boosted spending rates and inflation improvements, gold demand from the electronics industry could skyrocket.

While investors and central banks may reduce their gold purchases if the economy restores, the other demand sectors will level out gold prices, ultimately preventing catastrophic price drops. The way gold prices respond to all types of economic conditions makes it the preferred safe-haven investment choice for many investors. When the economy plummets, you can rely on gold prices to rise, though even as the economy succeeds, your investment shouldn’t fail entirely.

“If you are wondering if the current gold price is a good buy, I would say that in the long-term, gold is still cheap given the current conditions,”

Thorsten Polleit, a chief economist at Degussa, explains. Polleit predicts impressive gold performances throughout 2023, with prices reaching as high as $2,200. If these predictions play out, buying in during this temporary lull could be a smart choice for many investors.

“Central banks have a lot of liquidity they need to take back, and it’s going to be painful; it’s going to reduce consumption,” Polleit explains. “The reality is that markets already don’t have any confidence central banks will normalize monetary policies.”

While gold’s performance in February might’ve left some room for concern, most believe the dip was just that: a temporary dip. As always, investors should consult their financial advisors before making any portfolio decisions.

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