The price of gold has declined by over 2% this year, but it remains trading within a bullish trend. A stronger economy may have stifled any upside, but it has not completely discouraged investors from repurchasing gold. There are plenty of reasons why gold should continue to rise.
Gold prices are now near the US$1,800 level, and are testing horizontal resistance at $1,807/oz. This level should be supported by strong demand coming from the upcoming Indian festival. However, a break below this level could trigger a retest of the 100-week SMA at $1,798.
As the Federal Reserve continues to raise interest rates, the opportunity cost of holding gold is rising. This has dulled the metal’s appeal as an inflation hedge. It also makes it more difficult for gold to rebound from a bear market.
Fed Chairman Jerome Powell recently said that smaller rate hikes are ahead. Although this does not mean that the Fed will not raise rates in the future, it does signal that the Fed is no longer as hawkish as it once was. In addition, the economy has shown signs of slowing. Some ISM reports are now showing weaker readings, indicating a slowing economy.
With the Fed battling macroeconomic dynamics, investors and traders will be closely watching how the Fed will handle the rate increases. This will likely be the key to how gold prices perform.
While it would be nice for the Fed to hike interest rates by a full percentage point, it is unlikely that we will see that happen. That’s because the central bank is fighting inflation while trying to juggle a strong economy. Another concern is that the US dollar has continued to rally, reducing the appeal of gold as a safe haven in global markets.
Gold producers are committed to dividend payouts and share buybacks, and many are looking at ways to adjust the amount of money they distribute. Some link their dividends to cash flow and/or the gold price. But if the market keeps the price at this level, the producers will need to trim their payouts.
There are still a few potential catalysts that could push gold past the $1,800 level. One obvious catalyst would be an aggressive Russian escalation in the war with Ukraine. Other catalysts include a global financial crisis and a reversal in Fed policy.
If the Fed’s policies begin to shift away from the hawkish direction, gold prices should start to rebound. The Fed can’t afford to let a robust economy depress its buying power. On the other hand, a recession would be a positive for gold.
The next big event that might have an impact on the gold price is the release of US Inflation data. According to the Fed, the goal is for long-term inflation to be at 2%. Any upside surprise in the CPI, however, would be positive for gold.
Traders have been speculating on the timing of the Fed’s rate increases. Currently, the Fed is widely expected to raise rates by 25 basis points in February. Meanwhile, the Bank of England is also expected to increase the benchmark rate by 25 bps in June. Similarly, the European Central Bank is set to raise its interest rate to a positive level in July. Whether or not the Fed is able to keep inflation from eroding the purchasing power of the US consumer is a key question.
