Last Friday, gold sharply increased after a momentary slip the day prior. As the U.S. dollar continues retreating, inflation cools down, and the Federal Reserve hints at the end of its credit tightening cycle, gold has nowhere to go but up. Gold futures closed Monday at $2,003.50, firming its stance above the critical $2,000 line.
At a 5.90% year-to-date and 1.32% monthly gain rate, gold is in the position to achieve a positive year, despite the headwinds it continues to face. High interest rates mean high opportunity costs for holding non-yielding assets like gold, yet the precious metal has continued to hold strong even as rates approach the highest levels they’ve been since the 1980s. As we near the end of the tightening cycle, gold can hopefully begin performing at accelerated rates rather than just holding strong.
On Friday, the Commerce Department released the personal consumption expenditures (PCE) price index for June, revealing that inflation rates rose at a significantly more timid level compared to previous months. Inflation seems to be easing now, showing the slowest incline in the last two years.
The PCE price index increased by 0.2% in June compared to a 0.3% rise in May (excluding energy and volatile food sectors). With this figure, the annual gain from the last 12 months through June has come to 3%, signifying the slowest annual gain since March 2021.
“The inflation outbreak is winding down quicker and with less pain for the labor markets than economists could have imagined just a year ago,” Christopher Rupkey, a chief economist at FWDBONDS, explained. “This means policymakers can most likely skip a rate hike at the upcoming September meeting.”
The employment costs index increased by 1% last quarter, the slowest rise since the beginning of 2021. The employment cost index reflects the strongest measure of labor costs.
At the same time, salaries and wages only rose by 1%, also marking the smallest gain in the last two years. The tight demand for workers is slowly decreasing.
“Employers are not feeling the same pressure to increase wages as they have in the past few years,” Cory Stahle, an economist at Indeed Hiring Lab, explained.
Consumer spending also continued to increase in June. The figure makes up over two-thirds of the nation’s economic activity, and in June, it increased by 0.5% compared to just a 0.2% gain in May. With the increased consumer spending, economic growth reached a 2.4% annualized rate by the end of last quarter, signifying a large improvement from the first quarter’s 2% rate.
“The slowing trends in inflation and wages, and the slowdown in spending we expect, support our expectation that this week’s rate hike was the last,” Ellen Zentner, a chief U.S. economist at Morgan Stanley, explained.
With all of these economic conditions pointing toward positive improvements, it only makes sense that the Federal Reserve plans on easing its monetary policy. Going into September, the committee plans on reviewing incoming figures to make its next rate hike or pause decision. Based on all of the data mentioned above, many believe that the next decision will be a pause or the final end of the year-long cycle.
“The core PCE, which is what the Fed really looks at, came in line with estimates. It really wasn’t much of a surprise. Also, the dollar is weaker today and is giving a bit of a boost for gold,” Edward Meir, a metals analyst and researcher for Marex, explained.
“I think the Fed does not really mind seeing the stronger data as long as the inflation numbers continue to come down. The Fed is probably done raising rates, and I would in general be inclined to buy the dips on gold,” Meir continued.
Numerous European Central Bank policymakers are also discussing the potential end of its rate-hiking cycle. The opportunity costs of holding gold should continue to decline as central banks around the globe accept a more dovish monetary policy.
While gold may have dipped on Thursday due to momentary U.S. dollar gains, it quickly regained its territory when the dollar fell again on Friday by 0.16% against its currency rivals.
Moving forward, traders can continue assessing incoming economic data to predict how the Federal Reserve may respond by September. If the cycle ends moving beyond the committee’s next gathering, we will likely need to wait a few months before the Federal Reserve begins cutting rates. Some analysts predict to see rate cuts by 2024.
As always, investors should consult their financial advisors before making any portfolio decisions.