Gold prices held on to a week’s low on Tuesday as investors bet that aggressive tightening plans by major central banks will keep interest rates high for the long haul and boost US Treasury yields and hence the dollar. Experts in the field are trying to predict the future price movements of gold and question whether it is a safe haven.
“High movement in US interest rates scares gold investors”
At the beginning of the session, gold bullion touched $1,836.10, reaching its lowest level since June 1st. US gold futures held steady at $1,843.70. Stephen Innes, managing partner of SPI Asset Management, comments:
Gold investors are frightened by the high movement in US interest rates ahead of this week’s US bond auction. The dollar is rising after these high interest rates.
JP Morgan’s third quarter gold price expectation is $1,800
With the benchmark 10-year bond yields reaching the highest level in about a month dollar rose. Analysts at JP Morgan expect gold trading to be softer towards an average of $1,800 in the third quarter amid an expected recovery in investor risk sensitivity and the continued rise in US interest rates.
Kriptokoin.com The Federal Reserve is on track for half-point rate hikes in June and July, and last week’s solid employment report boosted the US central bank’s continued tightening expectations.
“We are in an environment of interest rate hikes that are bad for gold prices”
However, the CPI report to be released on Friday will provide more information on the pace of US interest rate hikes. It will give more clues. The European Central Bank will also meet next week as investors increase their bets on a rate hike this year. Stephen Innes comments:
Finally, we are in a global central bank rate hike environment that was initially bad for gold. But of course rate hikes come with the consequences of economic growth, so gold remains cautious.
“Gold may stay in range around $1,850 as summer trading starts”
Have we entered the summer trade? Gold prices are fixed in the $1,850 range and TD Securities strategists expect the yellow metal to trade close to this level. Strategists explain their forecasts as follows:
Gold prices are anchored in the $1,850 range, which previously held substantial open interest in options markets, as quantitative tightening begins and the market watches the Fed’s aggressive rate hike path on the horizon. Summer trading has officially started, suggesting that prices may remain range-bound around $1,850. But setup continues for additional purges on the horizon.
How does the relationship between gold prices and inflation work?
GoldForecast.com Editor Gary Wagner and CPM Group Managing Director Jeff Christian say gold is a long-term inflation hedge and safe haven. They also both agree that under certain conditions, gold is also a hedge against stock market volatility.
Referring to the idea that the role of gold as an inflation hedging tool means that the price should follow the inflation rate, Christian states that the yellow metal does not hedge in the short run and does not rise when low single-digit inflation is stable:
With inflation the correlation between changes in gold prices is 9%. Gold is good at protecting you against hyperinflation, but not particularly good at protecting you from inflation that gnaws at 1 to 3%.
Hyperinflation is generally defined as a monthly increase in prices of at least 50%. While Wagner agrees with Christian’s analysis, he adds that gold is a long-term inflation hedge, using the following statements:
Gold is an excellent hedge against inflation, but it is not sensitive to short-term movements. But over time, we’ve seen that it has the same purchasing power. In 1910 you could buy a night in the Plaza for an ounce of gold. An ounce of gold today you can still buy the same items.
Is gold really a safe haven?
Christian describes the safe-haven asset as having a low correlation with stocks and bonds, thus protecting investors against volatility. Noting that gold is a long-term safe-haven asset, “Overall, the correlation between gold and stocks is -4 to 5% in the long run.”
Equity markets saw big sell-offs, with the S&P 500 falling 13 percent to date. Christian adds that these recent events show gold’s safe-haven properties. “The second quarter was bad for gold and it’s likely to drop,” he says. Christian comments:
However, if you look at the first quarter, silver was the best performing asset among 11 asset classes, up 7.7% from Q1. Gold ranked second with 6.6. If anyone says that gold and silver are not doing their part in maintaining the value of their portfolio, it’s a result of poor American education.
Wagner notes that in general, stocks and gold move in opposite directions. However, he highlights quantitative easing as an exception to this trend:
If you look at 2008, when they poured liquidity into the markets, both US stocks and gold prices rose.
