Fundamental Analysis

Fed Rate Hikes Continue Weighing on Gold (GC) Futures Prices

  • Gold prices have lost nearly 20% of their value in the last six months.
  • Inflation in the US is still very high.
  • Rate increases in the US are making non-yielding gold less attractive.

The gold (GC) futures price has decreased by $400 per ounce, or 19.45%, in the last six months. There has to be a reason behind such a significant loss in such a short time. The Federal Reserve raised interest rates starting in March and continuing until September 15, which is the time it took for gold to lose about 20% of its value.

The journey began with the CPI at 9.5%, a 41-year inflation-high. To effectively start lowering the exceptionally high level of inflation, the Fed increased rates quickly.

The Federal Reserve’s monetary policy has had little to no impact over the past six months, causing inflation to drop from 9.5% in June to 8.3% in August. A 1.2% percent inflation reduction in six months cannot be seen as a success because Americans continue to struggle with the high cost of living.

However, the unpleasant reality is that far more rate increases are required and that rates will have to stay high for a lot longer than most people anticipate to bring inflation levels down significantly.

This week’s US inflation data showed an unexpected rise in August. PPI data also showed an increase that indicated high inflation at the producer level. These releases challenge the Federal Reserve to keep raising interest rates.

On the other hand, the US economy seems to be faring quite well under high interest rates. The latest retail sales data released yesterday showed a surge that translates to increased consumer spending in August.

US retail sales (Source: Census Bureau).

The retail sales data shows demand holding up in the US despite high inflation. This allows the Fed to make massive rate hikes to keep gold prices down.

Although gold is a secure investment during economic instability, interest rate hikes increase the opportunity cost of possessing non-yielding metal. Recent increases in the US dollar index, rising US Treasury yields, and an increase in US inflation have all combined to keep gold purchasers primarily dormant. The markets have fully priced an interest rate increase of at least 75 basis points and maybe up to 100 basis points at the Fed’s policy meeting next week.