The Fed’s Aggressive Interest Rate Rise Presses Gold Prices to Their Lowest Level in 9 Months

money.nikaniku.com – The Fed’s Aggressive Interest Rate Rise Presses Gold Prices to Their Lowest Level in 9 Months.

Gold prices today are near their lowest level in nine months. The cause of the weakening of gold prices was due to bets for aggressive interest rate hikes by the United States Central Bank (US) or the Federal Reserve (the Fed) and the attractiveness of the US dollar dimmed the appeal of gold.

Quoting CNBC, Tuesday (12/7/2022), world gold prices on the spot market fell 0.3 percent to USD 1,737.32 per ounce. US gold futures fell 0.3 percent to $1,737.00 an ounce.

Despite the risk of a recession, these days investors prefer the US dollar over gold. This pushed the US exchange rate to a nearly two-decade peak. This also erodes the attractiveness of gold bullion for overseas buyers.

Meanwhile, the Fed’s rate hike increases the opportunity cost of holding gold for not paying interest.

“Gold is under pressure as the US dollar is making big moves and there are expectations of a sizeable rate hike after the (recent US) federal report highlighted a strong labor market,” said OANDA senior analyst Edward Moya.

“Gold prices could tentatively break below the USD 1,700 level and then see strong support around USD 1,670.” he added.

US data on Friday showed the labor market moved ahead with strong jobs gains, providing the Fed with ammunition to deliver another 75 basis point rate hike this month.

Meanwhile, the Fed’s Esther George, who opposed the central bank’s 75 bps hike last month, said a sudden change in interest rates could create tension in the economy.

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Gold Prices Overshadowed by Fed Rate Increases, Inflation and Recession

The Fed's Aggressive Interest Rate Rise Presses Gold Prices to Their Lowest Level in 9 Months

After dropping USD 60 last week, gold prices remain vulnerable to a bigger sell-off. The reason is, the market is preparing for an aggressive increase in the Fed’s interest rates at the July 2022 meeting.

However, analysts are focusing on a potential price base that will trigger a turnaround momentum for the price of the precious metal.

The gold market is currently being hit by a strengthening US dollar index, which is picking up much of the safe-haven interest amid growing recession fears.

“Gold prices have fallen to levels last seen in September 2021 and are technically trading in oversold territory,” said Standard Chartered precious metals analyst Suki Cooper.

“While gold prices are caught between rising inflation risks and growing concerns over a recession, gold has again taken cues from the USD, which has benefited from safe-haven flows on gold,” he added.

On the other hand, data as of Friday (8/7/2022) has convinced the market that the Fed will continue to increase its benchmark interest rate by 75 basis points (bps) at its July meeting.

“What matters from here to investors is not how quickly the Fed raises interest rates, but how high they have to do it to slow the economy,” said Allianz Investment Management senior investment strategist Charlie Ripley.

Many Risks

Analysts see more downside risk for gold, up to around USD 1,700 per ounce or potentially even USD 1,650 per ounce. However, OANDA senior market analyst Edward Moya said that this would be the lowest price range in which investors would return to metals at that price level.

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“Once the price of USD 1,800 per ounce of gold broke this week, the selling pressure was tremendous. If things go bad, the price of gold could reach USD 1,650-1,675. This is the moment for buyers to come back. Gold is vulnerable to this decline. That is the key level,” he stressed. Moya.

Meanwhile Cooper is eyeing USD 1,690 an ounce, highlighting this level as the basis for a weaker gold price. He also described the July period as a slow seasonal period for demand.

“Gold has a safe-haven premium for now, but has eroded significantly. We expect gold to continue to follow clues from macro moves. Thus, prices could test lower later in the year, but concerns about inflation should limit the downside,” he said.

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