Gold has not been performing great for the past couple of months. Although the precious metal has traditionally acted as a store of value during times of economic upheaval, current circumstances have posed a challenge to this status.
With geopolitical factors have had a negative effect on the worldwide economy, several central banks around the world have been quite hawkish in an effort to prevent inflation. The U.S. Federal Reserve has been especially hawkish in recent months as economic conditions have deteriorated, increasing benchmark interest rates for more than three months consecutively to forestall economic inflation.
However, these efforts have had a dampening effect on gold across the world, with prices for the precious metal taking several hits amid increasing expenses and rising costs of living.
Recently, prices of the precious metal reached a one-month low following higher U.S. Treasury and dollar yields after Fed Chair Jerome Powell issued relatively hawkish remarks. Spot gold prices fell by 0.2% to $1,630 per ounce, their lowest since late September. U.S. gold futures also saw their prices go down by 1.2% to $1,630.9.
The drop in gold prices is probably due to the fact that the recent hawkish remarks and actions by the Fed have lowered gold’s appeal as a measure of value. Last week, the U.S. Fed surprised few people by raising the benchmark interest rate by 75 basis points. According to Powell, the peak for interest rates would most likely turn out higher than expected and it would be “extremely premature” to even consider pausing the interest rate hike.
Given that gold prices are affected by U.S. interest rates, the consistent months of rate hikes have also raised the opportunity cost of holding nonyielding gold bullion. For instance, as dollar prices went up by 1.4%, overseas investors found that the cost of holding gold increased as well.
Blue Line Futures chief marketing strategist Phillip Streible said that he doesn’t see gold “gathering bullish momentum” until the U.S. Federal Reserve finally stops raising benchmark interest rates; he also doesn’t expect to see the downward trend on gold prices changing any time soon. CMC Markets UK chief market analyst Michael Hewson believes the same, stating that gold prices will likely hit the lows of September and could even reach $1,000 as the opportunity cost of holding gold bullion increases.
Other metals such as platinum also saw prices fall by 1.2% to $918 an ounce; palladium went down by 2.6% to $1,806.33, and spot silver prices increased by 21% to reach $19.47. It is likely to be a bumpy ride ahead for gold miners such as Freeport-McMoRan Inc. (NYSE: FCX) as the price of gold varies in response to interest rate hikes.
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