Slowing Inflation Positively Influencing Gold Prices

The global economy has struggled over the past couple of years. The coronavirus pandemic was the first major blow, forcing plenty of countries to institute lockdown policies and significantly slowing economic activity.

The global economy was a long way from recovering as the pandemic wound down and countries began opening up when Russia invaded Ukraine. Given that both countries are major players in industries such as energy and food production, the Russia-Ukraine war has caused economic conditions around the world to significantly deteriorate.

This mix of conditions impacted the prices of gold to go down; traditionally gold prices have acted as stores of value. By mid-October, spot gold was down by 0.6% and trading at $1,663.06 while U.S. gold futures contracted by 0.4% to $1,670.

Consistent moves by the Fed to increase interest rates were partially to blame as they increased the opportunity cost of holding gold bullion and put off investors. Additionally, a surging dollar coupled with gains in U.S. yields depressed gold prices further.

However, gold prices have steadied amid bargain hunting to mitigate the pressure caused by the increasingly valuable greenback. By 4 p.m. last Monday, spot gold went up by 0.05% to $1,771.82 and U.S. golf futures rose by 0.34% to trade at $1,775.2. Kitco Metals analyst Jim Wyckoff noted that gold prices may go “sideways to higher” in the near term.

Last week was the best week for gold bullion since March 2020 as hopes of a lower interest rate hike by the Fed reduced the price pressure on the precious metal. Fed vice chair Lael Brainard recently indicated that the Fed would reduce its interest rate hike increments but emphasized that the central bank would do whatever it takes to forestall inflation even if it involves high-interest rate increments.

These rate hikes may be designed to battle inflation, but they tend to make gold less appealing because they don’t pay investors any interest.

Traders are casually optimistic that the Fed will have a smaller interest rate increment, with Fed fund futures traders seeing an 89% chance of the Fed announcing a 50 basis points increase at the December meeting and an 11% probability of a 75 basis point rise.

High Ridge Futures director of metals trading, David Meger, noted that with data indicating that inflation is slowing down, the expectation is that the Fed will slow down its interest rate hikes, easing the price pressure on gold and allowing it to rebound. This will be a welcome boost to industry players such as Freeport McMoRan Inc. (NYSE: FCX).

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