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Gold lost value for the last four consecutive days

Commentaries & Views

While there is still one trading day left in the week gold has lost considerable value since trading began on Monday. Considering December gold futures opened at $1819 this week and are currently fixed at $1772.20 per oz. gold has given up $47 in value. This amounts to a percentage decline of 2.58%. This week’s decline in gold prices occurred as a combination of selling pressure and dollar strength.

The last time the dollar was at its current value was July 18. The dollar opened at 105.52 on Monday and is currently fixed at 107.43. Gains this week in the dollar index have added 1.77% in value-based against a basket of six foreign currencies. The dollar gained 2.09 points this week or 1.77% and December gold futures have lost 2.58%. This means that the gains in the dollar contributed 0.81% to gold’s price decline.

Market participants have been active sellers of gold as rising yields and dollar strength has made the non-interest-bearing precious yellow metal less attractive.

Market sentiment has been shaped largely by recent and future actions by the Federal Reserve as they ratchet interest rates higher. Over the last four FOMC meetings, the Fed has implemented consecutive rate hikes. Beginning in March they raise rates by 25 basis points, 50 basis points in May, 75 basis points in June, and an additional 75 basis points in July. The net result is that Fed funds rates were near zero in March of this year and are now at 225 basis points to 250 basis points.

Although four consecutive rate hikes might seem like the Federal Reserve is raising rates too quickly to combat headline inflation at 8.5%. If you think that it couldn’t get much worse simply look back in history to realize that is an incorrect assumption. Between 2004 and 2006 the Federal Reserve raised interest rates 17 times. The net result was to take Fed funds rates from 1% to 5 ¼% to curb inflation and cool down an economy that was excessively overheated. Commercial banks raised their rates to 8.25% which is the real cost of borrowing capital by corporations.

Another factor to consider is many analysts and economists including myself understand that to effectively reduce inflation from its current level of 8.5% to an acceptable target of approximately 2%, interest rates at 2 ½% will have a minimal and tepid effect. The consensus amongst economists that believe that the Federal Reserve has been soft in regards to raising rates believes that the fed funds rate at minimum needs to be at 4 ½% if there is any hope that inflation will be reduced to two or 3%.

Another example of the Federal Reserve during a monetary tightening is in 2000 when fed funds rates were at 5.75% in February and 6.5% by December 2000. In August 1990, then Chairman Greenspan managed to take the fed funds rates up to a target level of 6.5% by May 2000. However, nothing matches interest rates in 1981 when the annual average came in at 16.63% according to data from Freddie Mac.

In other words, when you asked the question could whether interest rates continue to move higher simply look back in history two times when the Federal Reserve tackled inflation by raising interest rates. You will realize that our current rate of 2 ½% is exceedingly low when compared to other times of high levels of inflation and Federal Reserve rate hikes.

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Wishing you as always good trading,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.