Gold investors have plenty of reason to worry as prices for the precious metal have continued their downward trend into the last weeks of September. Last week, gold prices hit a two-year low as central banks across the world raised their interest rates alongside the U.S. Federal Reserve to prevent inflation.
With the global economy in a spiral since the COVID pandemic and the Russia-Ukraine war coupled with worldwide shortages and supply chain constraints, the cost of living has risen significantly in recent months. The Fed has gotten increasingly worried about the state of the economy and increased the benchmark interest rate by 0.75 basis points for several consecutive months to forestall inflation. Other central banks followed suit, resulting in a rise in interest rates around the world that impacted gold prices.
U.S. gold futures fell by 1.6% to $1,653 an ounce and spot gold went down by 1.4% to $1,647. Gold bullion also went down for the second consecutive week with a 1.8% drop in prices. The decline in gold prices comes after the U.S. dollar rallied and climbed to a two-decade high in May as fears about the Fed’s ability to forestall economic inflation led to an increase in risk-off sentiment.
OANDA senior analyst Edward Moya stated that gold will remain vulnerable in the short term as long as the dollar keeps trending upward. He added that with the economy “clearly” headed towards recession, elevated hard landing risks have increased flows into the dollar.
While this has been great for the greenback, it has had a dampening effect on dollar-priced gold bullion. Despite its long-standing status as a safe-haven asset, gold has always been sensitive to increasing interest rates in North America as the global economy essentially runs on the greenback. These interest rate hikes result in higher opportunity costs for holding nonyielding gold bullion, boosting the dollar but reducing demand for gold bullion.
Ole Hansen, head of commodity strategy at Saxo Bank, stated that as long as the danger of inflation looms and the market remains hawkish, semi-investment metals such as gold and silver will remain under pressure.
Like gold, other precious metals have experienced sharp drops in prices, with silver going down by 4.1% to $18.84 per ounce and platinum prices dropping by 4.8% to $857.46 per ounce. Palladium, which is mostly used in catalytic converters, saw its price drop by 4.7% to $2065.29 an ounce.
As the economic outlook of different countries continues to dim, gold is likely to regain its appeal, and companies such as Freeport-McMoRan Inc. (NYSE: FCX) will have ample opportunity to further strengthen their balance sheets and offer their shareholders decent returns on investment.
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