Gold prices dropped to their lowest levels in 6 month, weighed down by an assurgent US dollar as markets adjusted to a higher-for-longer interest rate scenario. As long as the central bank and underlying economic numbers are able to support the “Higher for Longer” thesis, the precious metal might continue to remain under pressure. Gold has a long history of being a valuable commodity, serving as money, jewelry, and value storage. Gold prices play a significant role in defining and understanding economic policy, financial market conditions, and economic growth.
The prospects of higher-for-longer U.S. rates sent investors scurrying to the safety of the dollar instead, making 0% yielding precious metal more expensive for buyers. During the past year, central bankers in west have been busy controlling inflation and on the opposite side of world, defending their currency. Inflationary environments often lead to increased gold prices as people seek shelter in safe-haven assets. During times of high inflation, the central bank, through monatory policy, controls higher inflation by increasing interest rates. When central banks raise interest rates, it directly impacts credit to the economy and offering higher return to investor, thereby slowing economic growth.
Recently released S&P Global Manufacturing PMI data came in at 49.8, above the forecasted level and the previous 47.6. This was a new high for the PMI since the last high in April. Given the resilient US economy, the Federal Reserve's willingness to maintain a high interest rate for longer, hawkish stance in September meeting and rising yield have been keeping gold under pressure.
As interpreted in the longer term, gold prices have been primarily driven by real interest rates. The US dollar index is touching its 9-month high of 107 levels, driven by continued strengthening of the expectation that US interest rates will stay higher for longer. The U.S. dollar and gold often have an inverse relationship, with a strong U.S. dollar associated with higher interest rates, making alternative investments like bonds and savings accounts more attractive.
As told by Federal Reserve James Powel in a September meeting, “real interest rates are now well above mainstream estimates of the neutral policy rate, but we are mindful of the inherent uncertainties in precisely gauging the stance of policy. We’re prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”
The dollar stood strong at a 10-month high against its major peers as Treasury yields stayed elevated on the prospect of higher-for-longer U.S. rates. Minneapolis Fed Bank President Neel Kashkari said on Tuesday that there is a 40% chance that the U.S. Federal Reserve will need to raise rates "meaningfully" to beat inflation.