(Kitco News) - It hasn’t been a good week for gold as prices dropped below $1,900 an ounce, falling roughly 5% after it was unable to break above $2,000 an ounce. However, there is still some fight left in the gold bulls as the market looks to end the week back above $1,900.
Gold was hit with some significant selling pressure as the U.S. dollar index has pushed to nearly a 20-year high. The green back has seen some serious bullish momentum as traders and investors prepare for the Federal Reserve’s monetary policy meeting next week. The U.S. central bank is setting itself up to aggressively raise interest rates with markets looking for three 50-basis point moves at the next three meetings.
At the same time markets are expecting interest rates to end the year above 3%. However, it looks like some investors are realizing that maybe market expectations have gotten a little ahead of themselves.
Yes the Federal Reserve has to deal with the growing inflation threat as consumer prices rise to their highest level in more than 40 years; however, it is looking less likely that the U.S. central bank can engineer a soft land as recession and stagflation fears start to grow.
A major shock this week came on Thursday with U.S. first-quarter GDP showed that the economy contracted by 1.4%; economists note that a lot of the decline in economic activity was due to trade imbalances. Although the consumer remains well supported, cracks are starting to show in the foundation.
The question is how long can the consumer last as inflation continues to rise. Friday the Federal Reserve’s preferred inflation measure: the core Personal Consumption Expenditures Index rose slightly less than expected, rising 5.2% for the year in March. However, when you include things like energy and food, things consumers also spend money on, the inflation increase was a lot more pronounced, rising 6.6% for the year.
Unfortunately, higher interest rates will not impact food and energy costs, these sectors continue to be impacted by Russia’s ongoing war with Ukraine. So there is not much the Fed can do to address supply-side issues.
This doesn’t mean that they shouldn’t do nothing, but it does mean that inflation is not going away anytime soon. This is the biggest reason why major banks remains bullish on gold. This past week both Commerzbank and Scotiabank increased their gold forecasts for 2022. Both banks see gold prices averaging the year around $1,900 an ounce.
“Gold investors may be betting that the Fed will avoid the most aggressive path of policy action later this year for fear of slowing economic growth too significantly; that would presumably keep inflation—against which bullion is viewed as a hedge—higher for longer,” said Marc Desormeaux, senior economist at Scotiabank in his forecast.
So next week is going to have major implications for gold but you don’t want to count out the precious metal just yet.