Gold prices dive as hawkish Federal Reserve prepares to counter inflation with interest rate hike
Gold prices plummeted $20 per ounce today with growing expectations of a hefty basis point hike in interest rates from the Federal Reserve this week to counter spiralling inflation.
The precious metal is trading below $1,860 per ounce this afternoon – currently hovering at $1,856 – after beginning the day at $1,875 per ounce.
This follows reports from the US that inflation has hit a 40-year high of 8.6 per cent on Friday, which initially buoyed gold markets – with investors favouring gold as a potential flight to safety asset amid market volatility.
However, with investors and analysts expecting as many as three rate hikes from banks this summer- including a potential 75 basis point rise on Wednesday – trading has slumped.
Rupert Rowling, market analyst at Kinesis Money told Morning Wire : “While these rates still remain low historically, after such a sustained period of low interest rates, the reaction on markets has shown how used everyone had become to being able to borrow ultra-cheaply.”
The US dollar has also enjoyed healthy gains since Friday, with gold typically experiencing an inverse relationship with the currency – normally dipping whenever the dollar surges.
Ricardo Evangelista, senior analyst at ActivTrades said: “It is possible that the central bank will extend its summer action from two to three hikes, with some analysts talking about the possibility of this Wednesday’s rate decision surprising with a 75 basis point rise, instead of the previously expected 50bp. Against such background, gold will find support from the flight to safety, as investors abandon riskier assets, however, such gains will be capped by the strengthening dollar and rises in treasury yields.”
He also argued the latest gloomy US inflation data was something of a surprise for analysts, as “many observers thought US inflation had peaked in April.”
Rolwing added: “Gold has found it pulled by two contrasting factors with an increased appeal for safe haven assets offset by the prospect of a series of rate hikes by central banks across the world.”
Commerzbank analyst Carsten Fritsch anticipates that US interest rates could reach 3.5 per cent into 2023, which could weigh down gold over the medium term.
However, he considered gold better placed than other precious metals which “are under significantly more pressure” as gold will still be considered a safe haven by some investors despite the hawkish rate increases from the Federal Reserve.
Exchange-traded funds in the precious metal were particularly popular among investors, with Bloomberg registering inflows of nearly 3 tons on Friday.