Investors in the yellow metal have had a rollercoaster over the past few years. In 2020, when the pandemic caused investors to duck for cover, it held up as a safe haven, with prices rising 17.2%. In 2021, with expectations of a recovery, it softened 3.4%.
The year 2022 also witnessed another upswing as markets were shaken by rising interest rates and inflation, the war in Ukraine and the prolonged lockdown measures in China. As a result, gold surged another 11.8%.
Gold tends to perform well in times of economic stress. when composite leading indicators turn strongly negative, gold performs positively while equities tend to be negative. Gold also outperforms Treasuries, which are seen as competing defensive assets.
In other words, the likely driver of gold moving forward is going to be the rate expectations for the Fed. The Fed has been very clear that it will be looking at incoming inflation data (particularly core PCE) and labour data to decide its policy pace. If either/both upcoming inflation data and labour prints come in lower than the market is expecting that should also lift gold. If inflation is falling and the labour market is weakening then the Fed should need to be less aggressive on rates. This, in turn, should weaken the USD and send yields lower which typically lifts both gold and silver prices. Also, note the very strong seasonal bias for gold upside in August on physical purchases which can also help gold prices higher
Gold prices have risen about 5% per cent since the end of June, when they hit over 3-month lows, with recent price gains mainly on the back of U.S. economic readings backing views that the Fed will raise interest rates on July 26 by 25 basis points, the last increase of the current tightening cycle.
While we give the edge to the bull camp, the trade should be temporarily disappointed with the lack of a fresh stimulus move from China following their decision to leave interest rates unchanged overnight. Looking ahead to US scheduled data later today, it is not a given that gold will benefit from softer US jobs data and growing confidence in an end to the rate hike cycle, as gold yesterday failed to benefit from soft US housing data. Nonetheless, soft data will add to the idea that rate hikes are coming to an end.
Increased safe haven demand, amid worsening global economic conditions, may also push flows into gold in the coming months.
Markets can become more volatile in September, so the price downtrend in the U.S. dollar index could accelerate, or reverse. Until then, the path of least resistance for the USDX will remain sideways to lower—barring an unexpected geopolitical event that would likely drive safe-haven demand into U.S. dollars. And if the event occurs otherwise then the markets will favour gold.