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(Kitco News) – It has not been a good week for gold as prices fell below $1,900 an ounce and fell about 5% after failing to break above $2,000 an ounce. However, the gold bulls are still struggling a bit as the market is expected to end the week back above $1,900.
Gold has been hit by significant selling pressures as the US Dollar Index climbed to near a 20-year high. The green back has seen some serious bullish momentum as traders and investors prepare for next week’s Federal Reserve policy meeting. The US Federal Reserve is preparing to hike interest rates aggressively, with markets expecting three 50 basis point moves over the next three meetings.
At the same time, markets expect interest rates to end the year above 3%. However, it looks like some investors are realizing that market expectations may have been slightly beaten.
Yes, the Federal Reserve must grapple with the growing threat of inflation as consumer prices soar to their highest levels in more than 40 years; However, the Federal Reserve looks less likely to create a soft country as fears of recession and stagflation begin to mount.
A big shock this week came on Thursday when US first-quarter GDP showed the economy contracted 1.4%; Economists note that much of the decline in economic activity is due to trade imbalances. Although the consumer remains well supported, cracks in the foundation are showing.
The question is how much longer the consumer can hold out if inflation continues to rise. Friday the Fed’s favorite inflation gauge: The core personal consumption spending index rose slightly less-than-expected, rising 5.2% for the year in March. However, when you include things like energy and groceries, which consumers also spend money on, the rise in inflation was much more pronounced, rising 6.6% for the year.
Unfortunately, higher interest rates will not affect food and energy costs, these sectors continue to be impacted by Russia’s ongoing war with Ukraine. So there’s not much the Fed can do to address supply-side issues.
That doesn’t mean they shouldn’t do anything, but it does mean inflation isn’t going away anytime soon. This is the main reason why major banks remain bullish on gold. Last week both Commerzbank and Scotiabank raised their gold forecasts for 2022. Both banks expect gold prices to average around $1,900 an ounce for the year.
“Gold investors could bet the Fed will avoid the most aggressive path of policy action later this year for fear of slowing economic growth too much; that would likely keep inflation – against which bullion is viewed as a hedge – higher for longer,” said Marc Desormeaux, senior economist at Scotiabank, in his forecast.
So the next week will be a big one for gold, but you don’t want to count the precious metal just yet.
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