Gold Set to Conclude Strong Month, with Interest Rates Approaching Their Peak

Gold prices are on track to reach a four-month high as interest rates approach peak levels. Central banks around the globe are nearing the end of their credit tightening cycles, giving gold the momentum it needs to reach the levels it achieved in March. With inflation rates calming to the lowest progressive rates in the last two years, many suspect the Federal Reserve has no reason to continue its hawkish attitudes toward hiking rates any longer.

Recent data released last Friday showed that inflation rates from June were progressing at the slowest pace in the last two years. Following this latest release, many feel even more positive about the Federal Reserve’s next decision. Last week’s meeting may have ended with a quarter-point hike, though the committee hinted at a potential pause going into September and onward as members assess economic conditions further.

Outside of the U.S., numerous central banks are following in the same footsteps as policymakers adopt more dovish attitudes on a global scale.

The European Central Bank is currently in the midst of its longest and most aggressive rate-hiking cycle ever. The stubborn inflation rates won’t seem to budge despite the central bank increasing borrowing costs for nine consecutive times now. With such high rates, Europe’s recession fears continue to heighten, giving rise to the need for a break in the tightening cycle.

With that being said, two policymakers released statements Thursday regarding their opinions on future hikes or pauses. Yannis Stournaras and Peter Kazimir of the European Central Bank both discussed the nearing end of the tightening cycle, though they disagreed on whether another hike would be necessary.

It looks like we are very close to the end of interest rate rises,” Stournaras, the Bank of Greece’s governor, explained when stating his reasoning for pausing rates. “In any case, if there is one further (rise) — I see it difficult — in September, I believe we will stop there.”

Conversely, Slovak Finance Minister Peter Kazimir believes the cycle may be “nearing the completion” but will still require “a firm step further.”

“Even if we were to take a break in September, it would be premature to consider it automatically … the end of the cycle,” Kazimir explained. “We are looking for the right place to stay for a large part of next year,” he continued. “And you will recognise that it has to be a place where we all must like it a little.”

Both policymakers agreed that the European Central Bank will likely not cut rates immediately after the final hike. Instead, the central bank will need to pause for a few months to assess economic conditions. Gediminas Simkus from the Bank of Lithuania agreed with this sentiment as well.

All this being said, core inflation rates in Europe are slowing at an underwhelming pace while companies continue recording poor activity rates. Growth forecast figures had to be revised down accordingly, though wage growth rates will hopefully help improve the tight labor market.

On the other hand, inflation improved significantly in Germany and France in July, Europe’s largest economies. Spanish and French economies showed significant growth last quarter at a sustained level thanks to heavy tourism rates. Such figures support Stournaras’ view of ending the cycle sooner rather than later.

In similar news, the Bank of Japan initiated a systematic shift in its monetary policy, loosening its long-term interest rate cap, adding more flexibility to how the interest rates rise with inflation.

“It is an important step towards eventual disbandment [of YCC],” Tom Nash, a portfolio manager at UBS Asset Management, explained.

Such a move could cause rippling effects across the globe, as a cheaper yen has defined numerous capital markets for some time now. Investors often use the yen to invest in higher-yielding assets, though this policy shift could change everything.

“Although the BOJ left the cap unchanged at ‘around 0.50%’, the subtle changes in language suggest that they are gearing up, or at least open to, tweaking the YCC target at a future date, provided that conditions are supportive,” Carlos Casanova, a senior Asia economist at UBP in Hong Kong, chimed in.

As central banks across the globe shift their monetary policies, gold reaps the rewards. Chinese physical gold reached a four-week high just last week, while gold futures are on a 1.32% monthly gain. Analysts are predicting further performance improvements from gold as central banks continue loosening their strategies.

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

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