Gold’s Potential Surge: Analyzing the Influence of Federal Reserve Pause Bets

Last week, gold prices had enough momentum to hit the highest weekly gain since April. With inflation finally lulling for the moment, market expectations are pointing toward a pause in interest rate hikes during the Federal Reserve’s next meeting, which only means positive things for gold. Spot gold increased by 1.8% for the week, settling at $1,964.40 per ounce on Friday.

Gold bullion reached its highest price since mid-June earlier last week as well following concerns over U.S. consumer prices. In June, U.S. consumer prices bottomed out, reaching their lowest annual percentage increase recorded in the last two years. With this hit to pricing and the sudden inflation lull, the Federal Reserve has only one path forward: pausing interest rates.

The idea of pausing interest rate hiking allows gold to rise, though the concept of the cycle finally ending would truly allow the precious metal to surge. Gold dampens with high interest rates, so when the cycle ceases, the precious metal should rise again. Despite this dampening, gold has still proven its ability to hold strong, even in the toughest economic times.

“With inflation backing off, the anticipation of further rate hikes has slightly declined, helping gold this week. But, prices are lower today as yields are ticking up,” Daniel Pavilonis, the senior market strategist at RJO Futures, explained.

“Prices are going to be range-bound near term. If the Fed begins to say we don’t need to raise rates any further, we can see gold rise further,” Pavilonis continued.

At the same time, the U.S. dollar is now on track to reach its biggest one-week plummet since last November. Such an event can mean multiple things.

To start, the falling asset gives rise to safe-haven buying in secure assets like gold. On the other hand, U.S. dollar drops signify that inflation is not off the table yet. Further inflation fears may mean further interest rate hikes, though only time can tell, so we will have to wait until the next Federal Reserve gathering.

Federal Governor Christopher Waller explained last Thursday that he is not ready to call an all-clear on inflation quite yet. Waller still favors additional interest rate hikes going into the second half of this year, based on his statements during June’s Federal Reserve meeting.

As a reminder, June’s meeting ended with a nearly unanimous interest rate pause, though a few members still wanted to hike rates.

“Most of those participants observed that leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress,” the minutes stated. At the same time, “some participants” wanted to initiate the rate hike for June, though “almost all participants judged it appropriate or acceptable to maintain” the current rate.

While increased interest rates may make gold assets more expensive in terms of opportunity costs, inflation can make the asset more attractive. If inflation rates do continue to rise, so does the need for inflation-hedging assets, such as gold. It’s a double-edged sword.

Outside of the U.S., Indian dealers have continued their program of offering discounts with all physical gold purchases. With domestic prices soaring, the government introduced the concept three weeks ago to reverse reductions in retail demand.

Meanwhile, the United Arab Emirates took refinery Emirates Gold off of its “good refinery” list certification scheme, according to the government’s website.

A shift occurred in Turkey’s gold activity as well. The central bank spent the last three months in a row selling gold reserves though it finally returned to purchasing the precious metal this month.

“Since March, the central bank has sold nearly 160 tonnes, equivalent to its cumulative purchases over the preceding 12 months,” Krishan Gopaul, a senior analyst at the World Gold Council, explained.

The selling spree came in response to “very strong gold demand and a temporary partial ban on gold bullion imports rather than a change to their long-term gold policy,” the World Gold Council noted.

However, as of June, the nation is back to buying. “Official gold reserves (CB + treasury) increased by 11 tonnes during the month, lifting total official gold reserves now total 440 tonnes,” Gopaul continued.

Between rising global demand and falling interest rate hike risks on the U.S. front, gold’s future is looking bright. The precious metal has wavered around the $1,950-per-ounce territory for quite some time now, though an end to the interest rate hike cycle may be exactly what it needs to break the $2,000-per-ounce line year again.

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

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