Gold Treads Water at Mid-$1,800 as All Eyes on Fed

© Reuters.

By Barani Krishnan

AiVIF.com -- Bulls in gold logged a second weekly loss as the yellow metal treaded water at mid-$1,800 levels amid a keen watch on the Federal Reserve’s next rate move, as U.S. inflation barely budged from 40-year highs.

Front-month gold futures for August on New York’s Comex was virtually unchanged, settling up just 50 cents at $1,830.20 an ounce. 

For the week though, the benchmark U.S. gold futures contract was down 0.6%, following through with the prior week’s decline of 1.9%.

“Gold remains trapped in a range as traders await to see if the latest inflation reports will force the Fed into committing to more massive rate hikes beyond the July policy meeting,” said Ed Moya, analyst at online trading platform OANDA.

Markets from stocks to bonds and oil have been whipsawed by volatility in the past fortnight as investors await to see if the Fed will carry through its threat to impose the most draconian rate hikes in a generation on U.S. consumers, in its bid to thwart inflation ramping at its highest since the early 1980s.

June’s 75-basis point, or three-quarter point, rate increase by the Fed is its biggest in 28 years.

Some policymakers at the central bank have advocated another 75-basis point hike for July. A more deterrent message against pricing pressures would be a 100-basis point, or full percentage point.

A combination of 50, 75 and 100 basis point hikes over the remaining four rate revisions for this year could help expedite the Fed’s aim of bringing inflation — measured by the Consumer Price Index at  8.6% during the year to May — back to the central bank’s target of just 2% per year.

Economists, however, fear that the Fed will push the economy into a recession with its quantum of hikes. The economy contracted by 1.4% in the first quarter of the year and will technically slip into a recession if it does not return to positive growth by the end of the second quarter. 

U.S. consumer sentiment fell to a new record low in the latest reading of the University of Michigan’s closely-followed Consumer Sentiment index released on Friday. Consumer spending accounts for 70% of American gross domestic product, or GDP.

Despite all these, the American consumer has remained incredibly resilient in facing the worst inflation since the 1980s. US household consumption accounts for around 68% of aggregate expenditure even after gross domestic product declined 1.4% in the first quarter. This is the kind of strength, economists say, could help GDP tread water and avoid a recession in 2022.

Sales of new homes in the United States also jumped almost 11% in May from a month earlier, according to data on Friday from the Commerce Department that overshot economists’ forecasts and underlined the Fed’s difficulty in restraining demand in a sector contributing to runaway inflation.

Gold is supposed to be a hedge against inflation and it typically rallies when investors become worried about a reduction in the purchasing power of the dollar. The best proof of gold’s standing as an inflation hedge was when it got to all-time highs of above $2,100 in August 2020 and again to above $2,000 between March and April this year.

But gold’s correlation with inflation has also not been perfect as its prices have also broken down numerous times when inflation data came in higher.

While some have put that down to market manipulation, further confounding the hedging theory is the joint rally by gold and the Dollar Index at times, as inflation concerns propped up bullion prices amid a run-up in the greenback and Treasury yields on expectations of Fed rate hikes. 

Despite those breakdowns, analysts are confident that gold would continue finding support at $1,800 and above in the near term.

“Gold should see strong support at the $1800 level as global recession fears should support strong buying of Treasuries at the long-end of the curve,” said OANDA’s Moya, cautioning, however, that  “bullion rallies may find resistance at the $1,840 area.”  ​