This week’s high-profile US CPI data came out, exceeding market expectations of 8.8% and breaking through 9.1% in one fell swoop. The soaring inflation data has given impetus to the dollar. Still, it has also brought a sharp shock to the gold market, and from the current situation, gold has sped up its decline and has fallen below $1750. The market is filled with hawkish rhetoric about aggressive interest rate hikes before the Fed’s meeting at the end of the month. Considering the continuous pressure on gold prices in the short term, would we see the golden bulls in action again in the second half of this year?
The gold market is still bearish as gold prices are in a downward trend, and the release of the upbeat CPI data has intensified the shock movement. The market is still not conducive to a long gold position. Once the gold price falls below the critical $1720 support level, the bears will have the opportunity to target a test of the $1710 and $1700 key levels.
Gold prices have been oscillating since the start of the second half of this year, and the demand for gold as a safe haven still exists. Despite being bearish over the short term, signs of a reversal over the medium and long term may still appear. As high inflation sweeps across the country, the possibility of central banks continuing to raise interest rates has dramatically increased, and so has the likelihood of many countries falling into recession. The market predicts that the Fed will likely raise interest rates aggressively by 75 or even 100 basis points next. If the economy cannot withstand a sharp interest rate hike and a downward trend in stocks, which makes the market risk aversion high, there is still a chance for gold prices to rebound.
In addition, we need to note that Western countries’ sanctions against Russia have spread to the gold market. At the recent G7 summit, the United States, Britain, Japan, Canada, and the four other countries announced the latest sanctions against Russia. A joint ban will be imposed on importing newly mined or refined gold from Russia. In contrast, all G7 member states will officially announce the ban’s implementation on the 28th of July.
Russia is the world’s second-largest gold producer, accounting for about 10% of the world’s production. The market was worried that the ban would cause gold prices to rebound. The impact of the prohibition on gold prices is minimal because the current gold reserves held by various countries’ central banks are at historic highs. Overproduction has driven governments to begin raising interest rates. Nevertheless, the outcome is tremendous pressure on gold by limiting a country’s output. If Europe bans imports of Russian gold, Russia will seek new gold buyers, predominantly Asian countries such as India.
Overall, in the second half of this year, safe-haven funds have poured into the US dollar under the expectation of interest rate hikes by the Federal Reserve, and short-term gold prices have continued to be under pressure. Gold investors should focus on whether the economic risks in various countries have heated up due to interest rate hikes. The macroeconomic data and employment data in multiple countries have started weakening. Many are waiting for the turning point in the CPI prints of different countries, especially the turning point of the dollar index and US Treasury yields.
The gold market is expected to be more volatile than in the first half of the year because it will face the challenges created by the austerity policies of various countries. Still, the gold demand has not yet dissipated due to high inflation and risks such as the Russo-Ukrainian war. However, gold prices are affected by the strengthening of the US dollar in the short term. Therefore, we expected risk factors to still support the gold price in the year’s second half. In addition, the continuous interest rate hikes have exacerbated the market’s concerns about the economic outlook and will increase the downside risks of the stock market. The sluggish stock market will also increase the attractiveness of gold for safe-haven investors.
Mike McGlone, the senior commodities strategist at Bloomberg, Intelligence, recently commented that once the market determines the end of the Fed rate hike cycle, gold prices could break through the key psychological mark of $2,000 an ounce. Judging from the CPI data recently released by the United States, inflation will likely have peaked in June. Therefore, if the CPI data gradually falls, it is more likely that the Fed will begin adjusting the pace of interest rate hikes in the year’s second half. Then gold may usher in new opportunities.
