Will the dollar keep it down?
The gold market story has been driven by the contrasting effects of persistent high inflation and central banks raising interest rates in response. With the US dollar hitting a 20-year high, gold fell to a one-and-a-half-year low on 11 July.
The price has since risen above the $1,700 an ounce range, but remains well below the $2,000 level seen in early March.
The price of gold is moved by a combination of supply, demand, and investor behaviour. That seems simple enough, yet the way those factors work together is sometimes counterintuitive. For instance, many investors think of gold as an inflation hedge. That has some common-sense plausibility, as paper money loses value as more is printed, while the supply of gold is relatively constant. As it happens, gold mining doesn't add much to supply from year to year. So, what is the true mover of gold prices?
In the past month, a weaker US dollar has provided the commodity with some positive momentum, but the fundamental reason for most analysts not having a bullish longer-term perspective on gold – rising US Treasury yields – remains intact.
What are the prospects for the gold market for the rest of the year, given the current macroeconomic and geopolitical environment? Should you invest in gold now?
In this article, we look at the recent drivers and gold price predictions from commodities analysts.
Gold vs dollar
The gold price dipped below the $1,800 mark for the first time since early February as the markets opened following the 4 July weekend in the US. Gold tends to trade in an inverse direction to the US dollar, as it becomes more expensive for buyers with other currencies and does not yield interest.
The commodity continued its decline into mid-July, marking the longest losing streak for gold since November 2020, after fresh signs of accelerating inflation encouraged bets that the US Federal Reserve (Fed) will take further aggressive steps to tame price increases.
The commodity has fought back for modest gains, however. As of 12 August, spot gold prices inched up to $1,796 per ounce, rising for four consecutive weeks. The price of gold was driven by increased recessionary fears and a weaker US dollar (DXY), as the Fed was set to raise interest rates by 75 basis points.
The dollar has benefited from the uncertain macroeconomic environment, with concerns about high inflation, the prospect of recession, slowing growth in China and the impact of the Russia-Ukraine war prompting investors to sell other assets in favour of holding dollars.
The US Dollar Index (DXY), which measures the performance of the dollar against a basket of other currencies, soared to 108.54 on 14 July – its highest level since mid-2002. It has since edged down to 105.38 as of 12 August.
Bob Haberkorn, senior market strategist at RJO Futures, explained the market dynamics to Bloomberg in mid-June 2022:
“Gold competes against the bond markets as a safe haven... a potential rate hike of 75 to 100 basis points by the [Federal Reserve] might make the bond market a little more attractive to safe-haven buyers than the gold market would normally be.”
Gold had climbed to a high of $2,043.30 on 8 March, a rise of 13.5% from the $1,800 level seen at the start of the year, as the Russia-Ukraine war escalated. That was close to the all-time high in dollar terms seen in August 2020 – above $2,070 – and a new record in euro terms.
The Fed has hiked interest rates four times so far in 2022. The Fed implemented a 25-basis-point hike in mid-March, a 50-basis-point increase on 4 May, and two consecutive 75-basis-point rises on 15 June and 22 July – the biggest rate increase since 1994.
As of 8 August, analysts at JP Morgan and LH Meyer expected there could be a third consecutive 75-basis-point hike in September. These expectations have the potential to limit the upside for the gold market in the near future.
A recession would be supportive to gold prices, but the sharp increase in interest rates being used to tackle inflation has so far been limiting the upside for the precious metal.
Piero Cingari, an analyst at Capital.com, commented on the recent price dynamics in a piece on 25 July:
“On 22 July 2022, the S&P Global US Composite PMI index fell to 47.5 in July from June’s reading of 52.3, indicating a significant decline in private sector output, both for manufacturing and services. The rate of decline was the steepest since the onset of the pandemic in May 2020. A contractionary July PMI in the US, ahead of this week’s Q2 GDP numbers, fuels recessionary fears as the US economy already contracted in Q1.
“Gold would benefit from further dollar weakness if a recession forced the Fed to stop tightening rates. The greater the severity of the economic downturn and the speed at which inflation eases, the larger the opportunity for gold to recoup its monthly losses.”
The World Gold Council, the market development organisation for the gold industry, recently opined that the commodity will face two key headwinds. The council’s mid-year gold outlook outlined the following negative factors that could exert downward pressure on gold:
Higher nominal interest rates
A potentially stronger dollar
However, the council also noted that the potential negative effects from the above may be offset by other, more supportive factors, including:
High, persistent inflation with gold playing catch-up to other commodities
Market volatility linked to shifts in monetary policy and geopolitics
The need for effective hedges that overcome potentially higher correlations between equities and bonds.
How is gold expected to trade for the rest of the year and in the longer term?
The Bottom Line
If you're looking at gold prices, it's probably a good idea to look at how well the economies of certain countries are doing. As economic conditions worsen, the price will (usually) rise. Gold is a commodity that isn't tied to anything else; in small doses, it makes a good diversifying element for a portfolio.