Gold Takes a Breather as Traders Evaluate Fed Rate Outlook

Gold prices lulled last week after July’s FOMC meeting revealed divided opinions among committee members over whether another rate hike would be necessary for reaching target inflation levels. With the U.S. dollar ticking higher and looming fears over hawkish Fed actions, gold has hesitated around the $1,900-per-ounce level awaiting September’s Federal Reserve meeting.

Gold ended the week on a higher note, with futures gaining from $1,915.20 per ounce to $1,916.50 per ounce. With prices still maintaining above critical $1,900-per-ounce lines, the precious metal continues proving its resilience despite headwinds.

The dollar index increased by 0.2%, a rare occurrence based on recent performance rates over the last few months. This increase made gold more expensive to overseas buyers, reducing demand as well.

The primary factor keeping gold at bay right now, however, is high interest rates and how long they may stay high. Recent CPI data offered positive news to the gold industry. The CPI report from July displayed cooling inflation rates, meaning the Federal Reserve should have no reason to enact another rate hike.

Following this data release, however, July’s FOMC meeting minutes came out, showing deeper insights regarding the committee’s opinions on the matter. Keep in mind the committee members shared these opinions back in late July before the recent CPI data, job figures, and more. Based on the latest information, the Federal Reserve may hold a slightly different stance.

July’s meeting showed mixed opinions regarding the need for further hikes. “Some participants” discussed how economic risks should not be pushed to their boundaries in order to reach inflation goals.

If we remember back to March, when the Federal Reserve first began enacting its quarter-point hikes, numerous banking fears arose, the most notorious issue being SVB Financial. The collapse of SVB Financial sparked a banking crisis that even trickled overseas into Asian and European sectors. While the Fed’s interest rate hikes didn’t directly cause SVB’s failure, they did contribute to it.

Based on certain committee member opinions, July’s meeting minutes stated that the committee would “be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

Despite this seemingly dovish stance, the rest of the statements in the document favored more aggressive policies. The minutes stated that “most” of the policymakers still prioritize the fight toward reaching target inflation levels. Whether this battle will involve a rate hike, pause, or drop is unclear.

“All members affirmed that they are strongly committed to returning inflation to their 2 percent objective,” the minutes stated.

The marketplace seems to have taken these statements as hawkish views from the Fed, implying the potential for further hikes. When you look at the data, this prediction may not necessarily be accurate.

Inflation levels are already on their way down. The Federal Reserve may simply need to maintain current rates for quite some time to achieve target levels.

“The broader economic situation looks better than it did three months ago, and inflation seems to be coming down the way the Fed wants, and in such a situation, there is less need for safe havens like gold,” Everett Millman, a chief market analyst at Gainesville Coins, explained.

While Millman’s argument for the drop in safe-haven assets may explain the dip in gold prices, it does not account for what could occur when interest rates go down. As inflation truly settles and interest rates begin dropping, the opportunity costs of buying gold will lower, making it a more appealing asset to investors. Gold prices go down when interest rates go up, so the reverse should theoretically happen once rates eventually settle.

When we evaluate the next Fed rate outlook, the odds seem to be in gold’s favor when compared to July’s meeting. According to CME’s FedWatch Tool, the likelihood of a rate pause is over 90%. Even in November, the odds of a hike are only around 30%.

Given gold’s current situation, many investors are choosing to take advantage of the low price points before the precious metal shoots up again. Moving forward, traders can continue analyzing the incoming data to assess how the Fed may respond during the next meeting.

While gold may be in a lull right now, numerous analysts expect it to reach levels as high as $2,100 to $2,500 by next year as interest rates go down. When interest rates will begin dropping is the key question here.

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

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