Since more and more people expect interest rates to increase, gold is seen as a risky investment and is losing its appeal. At the beginning of the month, bond markets thought the Fed funds rate would end up somewhere around 4.8%.
The rate has increased by over 50 basis points and is now stable at about 5.3%. The reaction to economic and employment data from the U.S. that was better than expected (NFP, ISM PMI services) was also low-key.
So, the Federal Reserve Bank would have to raise interest rates more often to ensure they stayed high. Because gold can’t keep up with inflation or deflation, its value as a store of value goes down when interest rates increase.
Some technical analysis about gold prices
At the beginning of February, a bear flag, a bearish continuation pattern, appeared on the 4-hour chart. It has reached its primary goal.
After the flag consolidation phase, it’s not unusual for the continuation (a bearish move) to be the same as the first move.
The gold price went below $1833, but it couldn’t keep going down and ending the day there. This is important for figuring out how likely the price will keep going below the psychologically important $1800.
When we look at the channel or “flag” level, we see that resistance started in 1875. Then, the current trend towards being bearish would have to be looked at again. Prices increased steadily from a low point in 1875 until June 2022 and again in November 2021.
What makes the price of gold go up or down?
The price of precious metals is affected by supply and demand, interest rates (and expectations of changes in interest rates), and the possibility that investors will act speculatively.
That might seem easy, but how these things work together is only sometimes, as you might think. Many investors, for example, see gold as a way to protect against inflation.
From the above graph, it’s clear that interest rates have a significant, adverse effect on the price of gold over time. Take note of how much the price of gold went up after the Fed cut interest rates in response to the COVID pandemic at the beginning of 2020.
As soon as U.S. interest rates hit their lowest point, gold stopped going up and down unexpectedly and started moving in a straight line. This was in line with what the Fed said would happen: rates would stay at zero for a long time.
Can gold be used as a hedge against inflation?
People often say that gold is an excellent way to protect against inflation, but there isn’t much of a link between inflation and gold. This is clear from the chart above, which shows how the sharp rise in inflation in 2022 caused interest rates and gold prices to go down.
Interest rates tend to move opposite to gold because gold doesn’t make any money (other than its price moving up or down).
As interest rates rise, investors move their money from gold into things that pay interest, like short-term U.S. Treasuries and other government bonds.
