Assessing the Impact of the Federal Reserve's Interest Rate Hikes on the Gold Market

As gold experiences its most challenging week since February, speculation arises over whether job and inflation data will reinforce the Federal Reserve's forecast of two additional rate increases. The potential implications of these moves on the value of gold are a major focus of industry watchers.

Under pressure from the Federal Reserve's plan for two additional rate hikes, the gold market has experienced a significant downturn of around $40 over the past week. The latest figures place August Comex gold futures at approximately $1,931.30 an ounce.

Federal Reserve Chairman, Jerome Powell, demonstrated unwavering commitment to these proposed hikes during his recent appearances before the U.S. Congress. This announcement prompted the gold sector to reassess the likelihood of rate reductions later this year.

Parallel to Powell's stance, several other central banks globally have adopted a more aggressive approach. The Bank of England unexpectedly raised its main interest rate to 5%, up from 4.5%. Similarly, Norway's central bank increased rates by 50 basis points, while the Swiss National Bank followed suit by lifting its rates from 1.5% to 1.75%.

Market analysts suggest that the global trend towards higher interest rates could position the U.S. dollar as a safer investment than gold. Suki Cooper, a precious metals analyst from Standard Chartered, confirmed, "Gold prices have taken a hit in the aftermath of the June central bank decisions. Investors anticipate further hikes, and with the dollar strengthening, gold is facing macroeconomic headwinds."

Beyond macroeconomic considerations, the technical positioning of gold paints a less than favorable picture. After slipping below the 100-day moving average of around $1,940 an ounce, industry experts predict further drops. Everett Millman, a precious metals expert from Gainesville Coins, expressed concern over the deteriorating technical performance, highlighting $1,940 as the new resistance level and $1,900 and $1,880 as support levels.

The market has seen many long position holders exit as rate cuts seem increasingly unlikely. Kevin Grady, president of Phoenix Futures and Options LLC, believes the market is eagerly awaiting signs from the Fed that rate hikes may cease.

The appetite for gold, although present, has encountered challenges due to ETF outflows accelerating in June and tactical positioning scaling back. Cooper indicated a shift in sentiment as summer typically represents a slower period for gold demand. She further highlighted, "Net fund length was at its lowest – with the deepest net short positioning since 2018 – in September 2022; positioning is still relatively elevated compared to nine months ago, but overall investor interest is at its lowest since 2018."

Over the coming weeks, all eyes will be on whether macroeconomic indicators, particularly job and inflation reports, validate the Fed's interest rate hike projections. Daniel Ghali, Senior Commodity Strategist at TD Securities, suggests caution, stating, "We think the data won't corroborate the Fed's expectations to hike rates further. We see a good chance that the Fed concluded the hiking cycle last May."

He further warns investors to remain vigilant regarding jobless claims and employment reports. Predicting a potential recession in the fourth quarter, Ghali remains optimistic about a potential gold rally towards $2,100 by early next year.

As gold is a forward-looking financial asset, the analyst explains that deteriorating data will increase the probability of rate cuts over the next 12 months, thereby triggering new investor inflows that support higher prices.

Millman concurs, stating that the future direction hinges heavily on upcoming economic data, and the prospect of two more rate hikes is far from certain. He reminds us that history has shown the Fed's propensity to cut rates after a pause, offering a glimmer of hope