Gold continues to fall as Federal Reserve won’t budge

on Sep 23, 2022
Updated: Oct 8, 2022
  • Gold hit a 2-year low this morning
  • Dollar continues to strengthen and interest rates hike again, so opportunity cost of holding gold is higher
  • With Fed resolving to fight inflation tooth and nail, there is a ceiling on gold prices for the time being

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It’s just a bloodbath across the board in markets this week. Or, to be honest, it has been all year.

Even gold, the supposed safe-haven asset to rule them all, has struggled mightily, dropping to a 2-year low this morning of $1,656 per ounce.

To me, it symbolises quite how unique a macro environment we are in. Because if you look historically, gold has performed extremely well in times of recession. And, hate to break it to you, but according to the official definition, that’s exactly what we are in now.

Like a lot of things recently in the world of economics, it centres on Jerome Powell and the Fed. Gold has dropped this week following a slew of rate hikes across the banking world, led by Powell himself, as the Fed announced another hike of 75 bps.

Gold is traditionally an inflation hedge and hence will rise as the value of cash falls. This is due to its perceived supply cap and historical record. However, rate hikes signal an aggressive pursuit against inflation, meaning liquidity is sucked out and the thesis for gold becomes somewhat subdued. That’s why we fell again this week.

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The dollar is moving from strength to strength as the Fed continues on its hiking path, and with interest rates higher, the opportunity cost of holding gold has simply risen. These variables have combined to place a ceiling where gold can go right now.

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The Fed has forecasted rates will rise to 4.25%-4.50% by the end of the year, and up to 4.50%-4.75% a year later. It doesn’t quite paint a picture of prosperity for gold holders.

“My main message has not changed since Jackson Hole,” Powell said in his news conference this week, referring to his policy speech at the Fed’s annual meeting in August a few weeks prior. “The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.

For gold investors, like everyone else, they’ll be hoping that the market has finally priced this in. Unfortunately, they’ve been hoping for that for a while now.


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