It’s just a bloodbath across the board in the markets this week. But honestly this has been the case all year.
Even gold, the supposed safe haven for investors, has suffered. The price dropped to a 2-year low of $1,656 an ounce this morning.
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To me, this symbolizes how unique the macro environment we are in is. Because if you look at the historical picture, gold has done extremely well in times of recession. And I hate to say it, but according to the official definition, that’s exactly what we’re in right now.
Like many things in the economic world lately, it’s all about Jerome Powell and the Fed. Gold has fallen this week following a slew of rate hikes in the banking world, led by Powell himself, when the Fed announced another 75bp hike.
Gold is traditionally an inflation hedge and will therefore rise as the value of cash falls. This is due to the perceived supply limit and historical record. Rate hikes, however, indicate an aggressive push for inflation, meaning liquidity is being sucked out and the position for gold is moderated somewhat. That is why the price has fallen again this week.
The dollar is getting stronger as the Fed continues its walk, and with higher interest rates, the opportunity cost of holding gold has simply increased. These variables have put together a ceiling that gold can now reach.
The Fed has forecast interest rates to rise to 4.25%-4.50% by the end of the year and 4.50%-4.75% a year later. It doesn’t quite paint a picture of wealth for gold holders.
“My main message hasn’t changed since Jackson Hole,” Powell said at his news conference this week, referring to his policy speech at the Fed’s annual meeting in August a few weeks earlier. “The FOMC is committed to reducing inflation to 2%, and we will continue until the job is done.”
Gold investors, like everyone else, hope that the market has finally priced this in. Unfortunately, they’ve been hoping for that for a while.
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