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(Kitco News) - I will be the first to admit that gold has been a frustrating asset to trade in the last two months as prices have dropped from their near-record highs above $2,080 an ounce to between $1,950 and $1,980.
Gold appears to be going nowhere fast, and while there are growing risks to the downside such as the Federal Reserve, investors shouldn't underestimate the underlying strength in the marketplace. Even the U.S. central bank can't make much of a dent in the support that continues to solidify.
All attention this week was on the Federal Reserve as it left interest rates unchanged in a range between 5.00% and 5.25%. This was widely expected, but what surprised the markets was the Committee's hawkish stance. The central bank was clear that this was just a pause in its tightening cycle. According to the updated economic projections, the Committee sees potential for two more rate hikes this year.
As expected, gold prices saw some significant selling as rising interest rates raise the precious metal's opportunity costs. Gold tested support at a three-month low of around $1,930 an ounce. However, heading into the weekend, prices are back in the broader range, trading at $1,970 an ounce, relatively unchanged on the day and week.
Despite the Fed's hawkish bias, it appears that investors don't need much of an excuse to buy gold. Prices bounced off their Thursday low after the European Central Bank signaled that it still needs to raise interest rates in July. ECB President Christine Lagarde said the central bank "still has ground to cover."
This is an interesting dynamic building in the global marketplace that will continue to support gold. Even with its two projected rate hikes, the Federal Reserve is a lot closer to the end of its tightening cycle than the ECB. This narrowing of the monetary policy gap between the two central banks will favor the euro over the U.S. dollar, which in turn is bullish for gold.
At the same time, there is another side to the Fed's current outlook that is driving gold: investors just don't believe the Fed's hawkish forecast. Economists and analysts have noted this week that the central bank's projections, also known as the "dot plots," are notoriously unreliable.
In June of last year, the Federal Reserve projected that the Funds rate would end 2023 at 3.80%; One year later, Wednesday's updated projections now show a possible terminal rate of 5.60%. Who knows what the dot plot will look like by the end of the year, let alone next year?
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| Gold prices stuck below $2,000 next week as bullish sentiment remains lackluster |
In an interview with Kitco News, Chantelle Schieven, head of research at Capitalight Research, said that despite all the hawkish talk, she thinks that the Federal Reserve is done raising rates. She expects that economic conditions will start to deteriorate during the summer and the Fed's next move will be to cut rates by the end of the year.
Schieven's outlook is also in line with comments from BlackRock last week, saying that they expect May was the central bank's last move. BlackRock still doesn't see any rate cut until 2024, however.
Some analysts are comparing the Fed's current stance to that of December 2018 when it signaled two rate hikes in 2019. The central bank ended up cutting rates three times that year and gold prices rallied 18%.
The final pillar of support for the gold market is the unprecedented degree of uncertainty throughout the global economy. Even in an environment of rising rates, Joseph Cavatoni, head market strategist for the Americas at the World Gold Council, told Kitco News that gold is still an important strategic asset in a portfolio.
So that is it for this week. Have a great weekend!
