June Gold: Don’t Give Up on the Long Side Yet
Gold futures are edging higher at the mid-session on Tuesday, attempting to claw back some of yesterday’s steep losses that drove the market into its lowest level since February 25. Investors buying the current dip are betting that soaring inflation and stalling global growth will reignite the bullish tone.
At 16:28 GMT, June Comex gold futures are trading $1903.20, up $7.20 or +0.38%. The SPDR Gold Shares ETF (GLD) is at $177.45, up $0.40 or +0.23%.
Short-Term Fundamentals Changing
Let’s face it, everybody and their mothers are expecting the Fed to raise its benchmark interest rate 50 basis points at its May 3-4 monetary policy meeting. Furthermore, there is also strong certainty the Fed will follow with similar rate hikes in June and July. After that, it will take a breather and raise rates only 25 basis points at every meeting until the end of the year.
Everybody also knows that with U.S. rates expected to rise sharply, the U.S. Dollar has become a sought after asset. Furthermore, when interest rates rise, traders sell gold because it is a non-yielding asset. Additionally, the stronger greenback has dampened demand for the dollar-denominated asset by foreign buyers.
Those are the existing conditions that mostly brought gold prices to where they are now. But with the Fed members on lockdown until after the meeting and the rate hike already fully-priced into the market, the fundamentals driving gold prices this week are a little different.
Fear Returns
Fear has returned to the financial markets and it’s not driving investors into gold for safe-haven protection. Investors are selling stocks and buying the more liquid safe-havens: Treasury Notes, the U.S. Dollar and the Japanese Yen.
What we’ve seen this week so far is a drop in Treasury yields and a surge in the U.S. Dollar. This is not the way these markets are supposed to react to the threat of a 50 basis point rate hike. But that’s the way they are supposed to react when the move is already fully-priced and investors are looking for protection.
Soaring Inflation and Stalling Global Growth
The Fed is in dangerous territory. By not applying the brakes to the so-called “transitory” inflation in 2021 out of fear of stalling the economic recovery, it is now being forced to raise rates more aggressively to stop inflation. But they still can stop the economic growth cold in its tracks.
So ahead of the Fed meeting, what do we know? We know that gold is cheaper than it was when the Fed last met in April. What we don’t know is how long and how many rate hikes will it take to stop the rise in inflation. What we don’t know is can the economy handle an aggressive Fed.
Gold is cheap. Inflation is high and the future strength of the economy is unknown. These are probably three good reasons why a speculator would start to test the waters in gold.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
