Gold looks set to end August on a downward trend, extending the month’s losses with the precious metal set for its fifth consecutive monthly decline, its worst run in 4 years.
The catalyst for gold’s reversal in fortunes was the switch in policy by the Federal Reserve to a more hawkish monetary policy in April that has resulted in a series of interest rate hikes in recent months as well as a reduction of the amount of the debt it holds. In some senses little has changed in the intervening months with Fed Chair Jerome Powell recently reiterating the need for more rate increases in order to bring inflation back down to its 2% target and more debt being allowed to mature.
In this environment, gold has struggled as higher interest rates make interest-paying assets such as bonds more attractive. The rally seen earlier in the month where gold climbed above $1,800 an ounce has proven illusory as it was built on the false expectation that promising US economic data would reduce the pace and severity of future interest rate hikes the Fed would need to impose. However, recent comments by a slew of Fed officials, culminating in Powell’s recent hawkish warning, have brought gold’s price crashing back down and it is now headed towards $1,700 an ounce.
How gold reacts as it approaches this key threshold will be demonstrative of the amount of support that remains for the metal. While there remain fears of a global recession as well as the ongoing war in Ukraine, there should be enough support to ensure gold doesn’t dip below the lows touched in July but on the other side it is hard to see how gold can make significant gains when central banks across the world are intent on raising interest rates.
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