Possible Rate Hikes, Strong Dollar Decreasing Gold’s Appeal

Gold has always been a safe haven asset for investors looking to retain the value of their money during times of market turmoil. However, gold prices have been down for quite a while and recently hit a six-month low as the U.S. dollar rallied and reached a two-decade high.

Spot gold fell by 1.4% to trade at $1,738.99 per ounce while U.S. gold futures were down by 1.5% to $1,738.3. Gold’s appeal as a safe haven asset, which may have diminished slightly due to the volatile markets, may also take a hit as the Federal Reserve adopts more restrictive monetary policies in an effort to stall inflation.

During their recent June meeting, Federal Reserve officials said that there was a high likelihood of the Fed increasing interest rates by 50 or 70 basis points during the July meeting. According to officials, elevated inflation pressures could force the Fed to take more restrictive measures, even if it means slowing the already-struggling economy.

Suki Cooper, an analyst from Standard Chartered, notes that gold has yielded to risk-off sentiment, while the U.S. dollar surged. Risk sentiment refers to how investors and traders in the financial markets are feeling and behaving. In a risk-off environment, prices of safe-haven assets increase as investors buy up bonds and gold.

The Fed’s increasingly hawkish stand against inflation will raise the opportunity costs of holding gold bullion and reduce interest.

New York-based independent metals trader Tai Wong says that the metal markets were not offered any relief from the Federal Reserve’s restrictive stance. He said that while gold may rally in the short term if payrolls are soft, the metal will need a softer U.S. consumer price index reading this week.

Such a reading would prevent the Fed from taking an even more restrictive stance and impact the metal markets. With the global economy currently in turmoil, inflation pressures may not be abating any time soon.

Factors such as rising energy prices, goods shortages, rising shipping costs, wages, trade barriers and the end of COVID-19 pandemic support significantly increased the cost of living in America and accelerated fears of impending economic inflation.  During last month’s meeting, the Fed stated that it raised benchmark borrowing rates by three-quarters a percentage point to forestall this historic rise in the cost of living. Furthermore, officials stated that they would continue to raise borrowing rates until inflation was down to 2%.

These periodic fluctuations in the price of gold on the world market are unlikely to dent the operations and plans of leading extraction companies such as Newmont Corporation (NYSE: NEM) (TSX: NGT) since they are resilient enough to ride out any short-term dips in the market.

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