Buy on Dips – the new mantra for gold

Gold prices rose through the first few months of the year, as investors sought a haven amid the geopolitical chaos unleashed by the war in Ukraine. Credit Suisse analysts said they see central bankers taming inflation through higher interest rates, and a shallow recession as being a more likely scenario than a deeper downturn. As a result, they lowered their gold price estimates this year to US$1,725 per ounce from US$1,850 per ounce, and they forecast US$1,650 per ounce in 2023.

The yellow metal is now well on track to record its sixth consecutive monthly loss amid a period of high inflation, something that has helped bullion prices in the past but not always. The global fight against inflation in the form of aggressive and simultaneous rate hikes by central banks is raising the risk of a recession and a string of financial crises in 2023, the World Bank said in a report.
Inflation appears out of control for the first time in decades. Stock markets have been pummelled. The shadow of a recession is looming amid rapidly rising interest rates. Russia’s ongoing assault on the Ukraine has unleashed chaos on global food supplies, trade and the political order. All these factors traditionally drive investors to buy gold, a safe store of value for centuries. Yet the prices of gold, along with equities of gold miners, are in free fall.

As gold falls below its support of $1,675thanks to the strengthening dollar that is weighing down the precious metal. Gold and the U.S. dollar often move in opposing directions. The dollar held close to two-decade highs, making green back –priced bullion more expensive for overseas buyers. Traders and investors appear to be favouring the perceived safe-haven greenback and US Treasuries over the precious metals. The dollar has been the biggest weigher on the price of gold along with Federal Reserve’s rate hikes.

Last week, gold fell three per cent to US$1,665 per ounce after the release of data that showed that U.S. inflation hit 8.3 per cent in August, the opposite of what you would have expected given fresh evidence of intense upward price pressure. Gold has now sunk some 20 per cent since hitting US$2,087 per ounce in March. Gold is not an inflation hedge, but rather “a hedge against stagflation” and “a hedge against investors losing faith in government and currencies.”

The Federal Reserve has been laser-focused on bringing inflation down to an acceptable level of approximately 2%. However, inflation remains exceedingly hot, and persistent. The CPI index hit a 41-year high in June coming in at 9.5%. The most recent data revealed that inflation remains extremely elevated coming in at 8.3% in August

Marketplace focus is now on this week’s FOMC meeting that begins Tuesday and ends Wednesday afternoon. The FOMC is generally expected to raise the key U.S. Fed funds rate by 0.75% in the Fed’s effort to tamp down problematic price inflation. However, there is scattered talk the Fed could do a full 1.0 percent rate hike. One investment bank’s research team said the Fed raising 100 basis points is possible but not likely. The Bank of England also holds its monetary policy meeting later this week, higher nominal rates coupled with potentially moderating inflation over the coming months (even if still well above the Fed’s 2 per cent target) will likely lead to lower gold price. This could lead to a spike in demand for the yellow metal as investors would take advantage of “buy on dips. This would probably improve the fundamentals for gold amidst rising political tensions domestically.

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