While there is still one trading day left in the week, gold has lost considerable value since trading began on Monday. Considering that December gold futures opened at $1,819 this week and are currently pegged at $1,772.20 per ounce. gold has given up $47 in value. This is equivalent to a percentage decrease of 2.58%. This week’s drop in gold prices came about as a combination of selling pressure and dollar strength.
The last time the dollar was at its current value was on July 18. The dollar opened at 105.52 on Monday and is currently pegged at 107.43. This week’s gains in the dollar index have added 1.77% in value against a basket of six foreign currencies. The dollar gained 2.09 points this week or 1.77% and December gold futures have lost 2.58%. This means that the dollar’s gains contributed 0.81% to the drop in the price of gold.
Market participants have been active sellers of gold as rising yields and a stronger dollar have made the non-interest-bearing precious yellow metal less attractive.
Market sentiment has been largely shaped by recent and future actions by the Federal Reserve as interest rates rise. During the last four FOMC meetings, the Fed has implemented consecutive rate hikes. Starting in March, rates increase by 25 basis points, 50 basis points in May, 75 basis points in June and an additional 75 basis points in July. The net result is that fed funds rates were close to zero in March of this year and are now between 225 and 250 basis points.
Although four consecutive rate hikes it may seem like the Fed is raising rates too fast to combat headline inflation at 8.5%. If you think it couldn’t get much worse, just look back in history to realize that’s an incorrect assumption. Between 2004 and 2006, the Federal Reserve raised interest rates 17 times. The net result was to push the fed funds rate from 1% to 5 ¼% to curb inflation and cool down an economy that was grossly overheated. Commercial banks raised their rates to 8.25%, which is the true cost of capital lending by corporations.
Another factor to consider is that many analysts and economists, including myself, understand that in order to effectively reduce inflation from its current level of 8.5% to an acceptable target of about 2%, interest rates at 2½% will have minimal effect and warm. The consensus among economists who believe the Fed has been soft on raising rates believes that the fed funds rate needs to be at a minimum of 4 ½% if there is any hope of inflation slowing to 2 or 3 %.
Another example of the Federal Reserve during a monetary tightening is in 2000 when the fed funds rates were at 5.75% in February and 6.5% in December 2000. In August 1990, then-Chairman Greenspan managed to bring rates of federal funds to a target level of 6.5% in May 2000. However, nothing equals the interest rates in 1981 when the annual average reached 16.63% according to data from Freddie Mac.
In other words, when you asked the question of whether interest rates continue to rise, simply look back in history twice when the Federal Reserve tackled inflation by raising interest rates. You will realize that our current rate of 2 ½% is extremely low compared to other times of high levels of inflation and Federal Reserve rate hikes.
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Wishing you good business as always,
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has gone to great lengths to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.