Gold gained support earlier this week as the U.S. dollar pulled back slightly with increased anticipation over a rate hold from the Fed based on the latest data from last week. With more confidence that we’re approaching the end of the rate-hiking cycle, the precious metal rose again, now maintaining solid ground above critical $1,900-per-ounce lines. Spot gold closed last Friday at its highest price point since early August as expectations of a rate pause increased significantly.
Spot gold started the week with a strong 0.1% rise to $1,940.80 per ounce. Gold futures followed suit with a 0.03% climb to $1,967.50 per ounce.
Most are currently forecasting the end of the interest-rate hiking cycle based on last week’s data. After figures showed moderate wage improvements and a jump in unemployment rates, the labor market seems to be easing. With that in mind, analysts believe a rate hike in September won’t be necessary.
At the same time, the dollar index decreased by 0.2%, making dollar-priced bullion more attractive to investors using other currencies. Between the dollar easing and the increased expectations of rate pauses, gold has gained excellent traction in recent weeks as we approach the FOMC meeting scheduled for September 19 and 20.
“More influential for gold going forward is going to be the shifting expectations for the first rate cut from the Fed, but also then the pace of rate cuts thereafter,” Craig Erlam, a senior markets analyst at OANDA, explained.
According to CME’s FedWatch Tool, the first few weigh-ins of a rate cut are in December. Just under 1% believe we may see our first cut by the end of the year.
Come March, the figure increases to 3.3%. By June of next year, we’re looking at a 24% chance of the first rate cut.
“September is almost nailed on at this point,” Erlam continued. The current odds of a rate pause in September are sitting at a healthy 93%. Most of the marketplace feels confident that rates will remain unchanged this month.
“I feel policy is appropriately restrictive,” Raphael Bostic, the Federal Reserve Bank of Atlanta president, explained. “I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”
The Fed clearly plans to maintain rates this month to prevent an overcorrection.
How the Federal Reserve will proceed after September leaves a lot of room for debate, however. November’s odds are close to 50/50. As such, we likely won’t be able to predict a rate pause, hike, or cut until economic readings come in following September’s decision.
Last week’s figures firmed the viewpoint that the U.S. economy is continuing to cool off in a healthy way. Such data supports the case that we shouldn’t need another hike, though anything can change when new reports come in.
With gold responding directly to interest rate levels, it makes sense that the precious metal has gained recent traction in response to these dovish viewpoints. Gold typically faces headwinds with high interest rates, so the hope for rate pauses pushes the precious metal up. The next determining factor will be how Treasury yields and the U.S. dollar respond to September’s meeting.
“The precious metal will be at the mercy of what happens to Treasury yields leading up to the September FOMC meeting,” Tim Waterer, the chief market analyst at KCM Trade, explained.
“If we do see a retreat in yields based on interest rate expectations being reigned in, this would be a positive development for gold,” Waterer continued.
Treasury yields fell from a two-week high earlier this week. This slip allowed gold to edge further ahead. Additional Fed officials are scheduled to make statements soon regarding monetary policy plans.
On Wednesday, the Boston Fed President, Susan Collins, spoke of treading carefully to minimize risks.
“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.”
We can expect more data to come through later this week, which will likely firm up interest rate expectations. As always, investors should consult their advisors before making any portfolio decisions.
