The Federal Reserve made a massive 75 basis points increase last week. In addition, there were great fluctuations in many markets. After all this, gold surprised this week with its resilience and stability. However, analysts do not see a significant rally in gold in the short term. Moreover, they don’t even rule out a return to $1,800.
Bart Melek: Gold’s relative excellent performance is surprising
The Fed made the largest rate hike since 1994, with 75 basis points. However, the reaction of gold to this decision of the Fed was very encouraging. Fed Chairman Jerome Powell pointed out that another 75 basis point increase in July is possible. In this context, he added that the so-called ‘soft landing’ will now be more dependent on external factors such as commodity prices.
After digesting the information, the stock market plunged sharply. Gold rallied around $40 on Thursday. However, the rally was short-lived as August Comex gold futures fell 0.44% to $1,841.70 on Friday. Bart Melek, head of global commodities strategy at TD Securities, comments:
The current relative excellent performance of gold is surprising. Because it usually monitors the Fed’s policy rates and real interest rates carefully. And the market has raised its year-end Fed Funds forecast to 3.6% now, from 2.7% in mid-May. At the same time, the 10-year real interest rate, which is the usual driving force, increased by 50 basis points compared to the previous month. The real interest rate reached 0.69%, rising nearly 180 basis points since the start of the year.
Everett Millman: Gold is doing its job even in the midst of this turmoil
Gainesville Coins precious metals expert Everett Millman says that the performance of gold stands out compared to the performance of other markets. Millman, in a statement, makes the following statement:
Other markets you look at, even some safe havens like the US dollar, are pretty volatile. The volatility of gold is relatively low. It is a sign of strength and gold that does its job even in the midst of turmoil in other beings.
“Until this time, gold will depend on the range”
As you can follow on Kriptokoin.com , gold has been mostly horizontal with an increase of 0.5% since the beginning of the year. However, Millman points out that this flexibility does not mean that a rally is just around the corner. The analyst makes the following comment on the subject:
We saw a nice gold rally and then we pulled back. I expect this to continue until the next Fed meeting in July. Until we find out if the Fed will make another major rate hike, gold will remain in the range. So it will be stuck in horizontal trading. Rate hikes are supposed to be bad for gold. But when inflation is this high, it will take many rate hikes for the Fed to get to the point where the real interest rate is neutral. That’s what gold cares about. Maybe they’ll get there next year.
“It is possible that increased recession risk will spur additional gold purchases”
Everett Millman sees gold between $1,800 and $1,900 over the summer. The analyst notes that $1,840 is a turning point from support to resistance. Millman continues to draw attention to the following points:
Inflation remains one of the main drivers of gold. However, if investors continue to fear losses in other assets, the increased risk of recession is likely to encourage additional gold purchases.
“Fed won’t change its mind anytime soon”
Bart Melek says gold ‘does a fantastic job’. However, that doesn’t mean the precious metal hasn’t corrected here and is back to $1,800. “This will be a modest fix, not a rout,” the analyst says. The thinking behind Melek’s projection is a persistent Fed that won’t give up on aggressive rate hikes at the first sign of economic distress. The analyst explains this view as follows:
My suspicion is that the Fed won’t change its mind anytime soon. Much more aggressive hikes are very likely in the face of strong inflationary forces. This will likely send gold back to May lows.
“It is possible for the gold price to drop below $1,800 by the end of the year”
According to the analyst, this means a return to the $1,824-1,808 range in the near term. Melek sees gold still likely to drop below $1,800 by the end of the year. The analyst comments:
It’s too early to tell if the Fed will flake off at the first sign of trouble. It’s likely to be in a situation where growth is starting to slow. However, we will not see a significant movement in inflation until September or October.
Data to watch next week
Among all the macro data for the coming week, housing will be a vital element to be watched closely. James Knightley, ING’s chief international economist, says the key to watch is the impact of the Fed’s high interest rates on the economy, including the housing market. The economist comments:
The Fed has signaled that it has a strong stomach to fight inflation. Therefore, we should expect more rate hikes in the coming months. But the greater the risk of a hard landing and a potential recession if we enter restrictive zones more and more quickly. The housing market is vulnerable.
Another event to watch will be Powell’s testimony before the Senate Banking, Housing and Urban Affairs Committee on Wednesday and the House Financial Services Committee on Thursday.
