Gold is drifting steadily downwards to now trade near $1,640 an ounce after a Federal Reserve official stated that the US central bank may need to continue raising interest rates higher than 4.5% if inflation fails to slow.
Yesterday’s comments by Neel Kashkari, Minneapolis Fed President, were a stark reminder of the difficult macroeconomic environment gold finds itself in with central banks across the world looking to increase interest rates, further diminishing gold’s appeal due to its lack of yield-making interest-paying assets more attractive to investors instead.
Persistently high inflation remains a significant headwind for gold due to the aggressive monetary policies being adopted by central banks to bring it under control with today bringing a fresh illustration of the scale of the challenge with the UK’s latest inflation figure coming in above expectations at 10.1%, the highest level in 40 years.
This bearish macroeconomic environment is more than offsetting gold’s potential gains from haven demand given the continuing, and potentially escalating, war in Ukraine. Yet with the realities of the need for central banks, particularly the Fed, to keep on hiking rates well known about for some time now, the bulk of gold’s pain may already be priced in so while it is hard to see gold climbing to $1,700 an ounce, it is equally unlikely for the price to fall below $1,600 an ounce.
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