The Fed’s tightening of its monetary policy and the escalating trade war continued to dominate the news last week, with gold prices caught in the middle of these opposing market forces. However, the yellow metal found an ally in gold bug and United State President Donald Trump when he criticized the Fed’s plans to keep raising interest rates. His statements and the reemergent threat of a currency war sent the price of gold climbing as the markets closed for the week.
What other market forces typically impact gold prices? Read “How These 10 Factors Regularly Influence Gold Prices.”
Gold Price Movement Indicators:
Monday, July 16, 2018
Traders sold dollars in anticipation of the meeting between President Donald Trump and Russian President Vladimir Putin on Monday and Fed Chairman Jerome Powell’s first congressional testimony on Tuesday. The index that measures the greenback against a basket of six other currencies, the ICE, fell .3 percent to 94.503. Pegged to the dollar, gold prices become more affordable to investors in foreign countries when the currency loses value.
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Decreasing Foreign Demand
Prices for gold may have been more appealing to foreign investors on Monday, but demand has been decreasing in the top gold-buying countries of India and China (read more on China’s Long-Term Plan Focused on a New Gold Standard). Data showing that the world’s second largest economy expanded at a slower pace in the second quarter and a decrease in the rupee that resulted in local prices rising to their highest in about 21 months were behind the pullback in gold purchases.
However, gold’s safe haven status could improve demand given the worsening geo-economic climate. ‘Investors may favor gold again, especially if trade friction rises further and becomes a more sizeable threat to economic growth and to the decade-long equity market bull run,’ explained Citi analysts.
Gold prices hit their high for the week of $1,244.40 at 2 am, then dipped to the low for the day of $1,238.10 at 1 pm.
Tuesday, July 17, 2018
Hawkish Federal Reserve
‘With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that—for now—the best way forward is to keep gradually raising the federal funds rate,’ said Fed chairman Jerome Powell during testimony to the Senate Banking Committee on Tuesday. Fed analysts read the ‘for now’ in Powell’s statement as a suggestion that the central bank will shift its policy of automatic rate hikes to evaluating the economy first before making rate adjustments in 2019.
Given that members of the Fed have started voicing concern about inflation, an overheated economy, and the potentially harmful effects of the trade war, this policy change is understandable. Perhaps Powell heard this warning from International Monetary Fund Chief Economist Maury Obstfeld on Monday while preparing to testify: ‘The risk that current trade tensions escalate further with adverse effects on confidence, asset prices, and investment is the greatest near-term risk to global growth.’
Markets took the Fed’s statements as confirmation of two more rate increases in 2018 and opted for interest-bearing assets, which put pressure on gold prices. The high of $1,244 at 5 am was followed by the low of $1,226.50 at 11 am and 1 pm. However, with even the central bank taking notice of the risks the economy currently faces and hinting at rate policy changes, long-term investors aren’t trading in their safe haven gold for minor short-term gains.
Wednesday, July 18, 2018
The Fed’s hawkish stance toward interest rates for the rest of the year served as a tailwind to the dollar on Wednesday. The greenback rose to a six-month high against the yen, making dollar-denominated gold more expensive for foreign buyers. ‘People are selling (instruments of) emerging markets, commodities and buying the dollar as it seems to be the most stable investment. As long as this trend continues … it’s a pretty tough situation for commodities,’ asserted the Tokyo branch manager of the ICBC Standard Bank Yuichi Ikemizu.
Experts have been predicting a major dollar crash for a while now, so the greenback may be heading down in the near future. Read more on “When Will the Dollar Crash?”
The price of gold dipped to a low of $1,222.20 at 5 am and 8 am before climbing to the high of $1,227.40 at 2 pm and 4 pm.
Thursday, July 19, 2018
President Criticizes The Fed
Even the president is concerned about the impact of the Fed’s tightening monetary policy on an already fragile economy. In a rare move for a U.S. president, Trump expressed frustration with the U.S. central bank for potentially disrupting the country’s economic recovery in an interview with CNBC on Thursday: “I’m not thrilled. … Because we go up and every time you go up they want to raise rates again. I don’t really—I’m not happy about it.”
Treasury yields, the dollar, and stocks all fell following the president’s comments. Gold’s daily trajectory reflected increased investor interest: prices rose from the low of $1,213.60 at 9 am to the high of $1,225.50 at 2 pm.
Friday, July 20, 2018
Faced with an economic slowdown and escalating trade war, China’s central bank indicated that that a weaker currency would be acceptable. The yuan subsequently fell to its lowest level in more than a year and was down 8 percent for the past three months on Friday. BMI research firm analysts noted, “that the yuan is weakening because investors expect the bank to loosen monetary policy ‘in a bid to support an economy that is facing multiple headwinds,’ including a trade war with the United States.”
In the past Chinese currency devaluation has caused stocks to fall, so a plummeting yuan could knock the equities market off its record-long bull run. Since gold is correlated to the yuan, the country will likely purchase more of the yellow metal, adding to its already massive holdings and advancing China’s goal to dethrone the dollar as the global reserve currency with a gold-backed yuan.
Lifted by the doubt cast on further Fed rate hikes and the threat of currency devaluation, gold prices rose from the low of $1,218.30 at midnight to the high of $1,231.60 at 5 pm.
See our Gold Spot Price Chart for today’s numbers.