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Gold Prices Inch Higher As Fed’s Inflation Battle Draws To A Close

  • Gold prices have consolidated this week following a rally sparked by the Federal Reserve's success in controlling inflation, with the precious metal trading at $1,956 per ounce.
  • Chairman Jerome Powell's hawkish approach to inflation, including 10 interest rate hikes since last March, has seen U.S. inflation dip to just three per cent, with only one more increase expected from the Fed in September.
  • Despite the surge in gold prices, market analysts warn that improving economic data and the potential for another interest rate hike could dampen the momentum and cause prices to tumble.

Gold markets have consolidated this week’s price rally, buoyed by growing expectations that the Federal Reserve’s battle to curb inflation is drawing to a successful close.

The precious metal was trading at $1,956 per ounce this morning – having peaked at $1,963 per ounce overnight – and risen over $20 per ounce in Wednesday’s session.

Chair Jerome Powell has been hawkish in his bid to contain inflation, hiking interest rates 10 times since last March, which are currently at 5 to 5.25 per cent.

However, encouraging consumer price data showed US inflation has dipped to just three per cent, meaning there are now expectations of just one more increase from the Fed in September before interest rates finally peak.

Gold prices have remained historically elevated this year due to its safe haven asset qualities, amid sustained expectations of a global economic downturn.

But interest rate hikes have taken the momentum out of any potential price rallies to match the levels gold reached following Russia’s invasion of Ukraine.

Typically, interest rate hikes make stocks and government bonds more attractive to investors than gold, which has previously taken the momentum out of any previous potential rallies over the summer.

Its peak has raised expectations in the market that more investors will turn towards gold, although improving economic data could prove to be a headwind later this year.

Rupert Rowling, market analyst at Kinesis Money, said: “The fact that gold was able to stay above $1,900 an ounce for so long before its recent climb back above $1,950 underlines the strength of underlying support there is for this safe haven asset with market confidence still fragile. Now with market confidence improving and equities gaining, the current gold price starts to look unsustainably high.”

He forecasts that with a two-month wait for the next interest rate hike, there is still sufficient time for market sentiment to change, which could “really cause the price to tumble.”

Craig Erlam, senior market analyst at Oanda, added: “Now it’s a question of whether what we’re seeing is a corrective move as part of the downturn since May or if that downturn was in fact the correction.”

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By Nicholas Earl via CityAm

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