Gold is trading a little above $1,800 an ounce at its lowest level in two months as markets prepare for more interest rate hikes, with the European Central Bank’s Christine Lagarde saying the bank had “every reason” to make a 50 basis point increase in March.
In this readjusted macroeconomic environment where interest rates, particularly those of the Federal Reserve, are now likely to increase higher and for longer than anticipated in January, gold has endured a sharp reality check with its price tumbling by almost $150 an ounce so far in February.
How far gold continues to slide will be determined by the strength of support that remains from central banks and other institutional holders. Last year saw the central banks of Turkey, China and India add considerable amounts of gold to their holdings and given that the motives for doing that, diversification away from US dollar hegemony, remains as valid this year as it did last, there is no reason to think that buying appetite will be any less this year.
As such, while gold is clearly on a downtrend currently, the impact of the readjustment on interest rate expectations should soon be fully priced in and enable gold to stabilise around $1,800 an ounce.
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