Price of Gold Fundamental Daily Forecast – Upside Limited if Fed Keeps Raising Rates

Gold futures are edging higher early Tuesday as Treasury yields and the U.S. Dollar continued to weaken amid expectations that interest rate hikes by the U.S. Federal Reserve may moderate over time.

Demand for bullion was boosted on Monday following the release of disappointing manufacturing surveys in Asia, Europe and the United States.

There are two schools of thought driving the bullish price action at this time. The first supports the notion that a global recession will force central banks to tap the breaks on aggressively raising interest rates.

The second supports the idea that the central bank rate hikes have had a positive effect on prices and that inflation may be peaking. This could also encourage the central banks to lighten up on the tightening.

At 04:02 GMT, December Comex gold futures are trading $1790.60, up $2.90 or +0.16%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $165.03, up $0.93 or +0.57%.

US Economy Weakening; Fed Should Tap the Breaks on Rate Hikes

Federal Reserve Chairman Jerome Powell said July 27 he does not believe the U.S. economy is in a recession as the central bank raised rates further to fight inflation.

“I do not think the U.S. is currently in a recession and the reason is there are too many areas of the economy that are performing too well,” Powell said at a press conference following the Fed’s decision to raise rates by 0.75 percentage points for a second consecutive time. “This is a very strong labor market…it doesn’t make sense that the economy would be in a recession with this kind of thing happening.”

Investors have been fearing the Fed’s hiking campaign may tip the economy into a recession, but Powell also said the central bank will be closely watching economic data as to determine futures moves. While another large hike may be necessary, he added that there will come a point when the Fed needs to slow the pace of increases.

The last sentence is what is driving Treasury yields lower, pushing the dollar down and underpinning gold prices.

Inflation May Be Peaking; Dampening the Need for Aggressive Rate Hikes

Another reason for the gold rally may be the thought that inflation is peaking and the Fed may not have to raise rates aggressively moving forward.

On Monday, U.S. Treasury yields fell after a few key reports signaled that high inflation may be cooling off. The dip in bonds came after the ISM manufacturing report for July showed a sharper-than-expected decline in prices paid. The measure can be seen as a sign that inflation could decline in the coming months.

Given this situation, the Fed is likely to respond with smaller rate increases in the coming meeting.

Daily Forecast

The market looks pretty simple right now because rates are falling, the dollar is weakening and gold prices are going up. It all looks pretty textbook to me. But will it last is the question.

We’re probably a few days too early before we get a definitive answer to the question. That’s because the big data point this week will be Friday’s non-farm payrolls report from the Bureau of Labor Statistics, which will give more insight into the strong labor market.

Furthermore, we’re not so sure Fed policymakers are willing to pull back the reins on inflation either. Last Friday, Fed Bank of Atlanta President Raphael Bostic said on Friday the monetary authority has further to go in raising borrowing costs – And this comment came following the release of the negative GDP report.

Additionally, Fed Bank of Minneapolis President Neel Kashkari said Sunday the U.S. central bank is committed to slowing inflation to about 2 percent.

If the Fed’s mandate is to get inflation down to 2 percent then they are going to have a hard time preventing recession, but prices aren’t going to drop down to that level unless the Fed keeps the upward pressure on interest rates.

That being said, gold’s upside is limited.