The gold market is currently trading in a neutral channel around $1,950, but it is well positioned to benefit when sentiment changes, which may happen sooner than expected.
Despite expectations of a soft landing and the U.S. avoiding a recession, many analysts remain skeptical about achieving this optimistic goal. Gold’s price action suggests that investors are taking a cautious stance to protect themselves against a potential downturn.
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Gold’s resilience is even more impressive considering recent developments. Although the Federal Reserve decided not to raise interest rates, it maintained a hawkish bias. Federal Reserve Chair Jerome Powell stated that while interest rates are close to their peak, they will remain at restrictive levels for the foreseeable future. Powell also indicated that the central bank will only know when rates are sufficiently restrictive when they see it.
One surprising aspect of the Fed’s decision was its projection of only two potential rate cuts next year compared to the four rate cuts projected in June. This supports the growing narrative of a “higher-for-longer” environment.
The Fed’s stance has pushed 10-year bond yields to a 15-year high at 4.5%. Additionally, the U.S. dollar index reached its highest level since November 2022, surpassing 105 points. Real yields have also risen to 2%, a 50 basis points increase from the previous month, according to analysts at Commerzbank.
Despite these developments, gold continues to hold steady around $1,950, a significant psychological level.
George Milling-Stanley, chief gold strategist at State Street Global Advisors, emphasizes that gold remains an important portfolio diversifier amid the Fed’s pressure to cool down inflation. He believes that equity markets have more to fear from the Fed than gold does.
Other central banks, including the Swiss National Bank, the Bank of England, and the Bank of Japan, also maintained their interest rates unchanged this week. Both the SNB and the BOE stated that they are close to controlling inflation as economic growth weakens. Gold performed well against these currencies after their monetary policy decisions.
Although the gold market currently lacks momentum due to investor caution, Milling-Stanley believes there is still significant growth potential. State Street’s gold investor survey, updated from June, revealed that 20% of respondents held some gold. The analysis also indicated that one-third of investors did not invest in gold due to a lack of knowledge about how to invest in the precious metal.
In addition to investor demand, central bank demand continues to provide a solid foundation. The World Gold Council reported that Russia’s central bank purchased 3 tonnes of gold last month, bringing Russia’s gold reserves back to their 2022 levels.
Note From Our Gold Guy: Whenever we publish these types of articles that promote the idea of holding gold or silver bullion rather than investing in the “rare” coins that are promoted by the vast majority of precious metals companies, we are often accused of only promoting bullion because that’s what we sell. The truth is we have access to both bullion AND numismatic coins. We recommend bullion in today’s financial climate because if the economy were to take a major downturn or even collapse, it won’t matter how “rare” or “limited” a gold or silver coin is. Its value will be based on weight and quality. We can help customers invest in numismatics or hedge their portfolios with physical bullion. We simply recommend bullion because we believe it’s the smarter play right now.