Gold investors still need to be patient
After falling to a new two-year low, the gold market was thrown another lifeline after the Wall Street Journal reported that the Federal Reserve could start to slow the pace of interest rates after its November monetary policy meeting.
Gold prices have managed to end the week back above $1,650, which has been an important short-term psychological level for many investors and technical analysts.
Unfortunately, gold investors have been burned by false hope before. Every time markets start whispering about a potential pivot, gold investors jump into the market and spark a short-term buying frenzy.
So far this year, Rallies have proven to be short-lived because the reality is that with persistently high inflation, the Federal Reserve and other global central banks aren't finished tightening monetary policies.
Although the Fed may slow down its rate hikes into 2023, expectations of a terminal rate above 5% remain in place. According to many market analysts, until that changes, the U.S. dollar will continue to see significant bullish momentum.
And it's not just the U.S. dollar. The Federal Reserve's tightening cycle has pushed the yield on 10-year notes to its highest level since 2008 and is above 4%. Real yields, measured by Treasury Inflation-Protected Securities (TIPS), are trading at 1.7%, a 13-year high. No matter how you look at it, this is a challenging environment for gold and precious metals.
For now, it appears that patients remains the keyword for gold investors. This was a central theme during the London Bullion Market Association's Global Precious Metals Conference. While gold remains an attractive asset in the long term, many analysts have said that now is not the time to buy as the U.S. dollar and rising interest rates will keep prices contained.
Although the market is challenging, many analysts have said that solid physical demand highlights the explosive potential in gold and silver once the Fed Funds rate tops.
Of course, what could make this new rally in gold a little different and sustainable is that consumers are starting to feel the effects of rising interest rates and tighter market conditions are roiling financial markets.
LBMA delegates see silver prices rallying 54% in the next 12 months
Massive uncertainty in the British bond market, followed by the collapse of the Truss government after only 44 days in power, shows how much turmoil there is in the global economy. At the same time, the Bank of Japan is now consistently intervening in currency markets to protect its economy from the unprecedented strength of the U.S. dollar.
Even some major economists are warning about the growing threat of a severe recession looming on the horizon. Dr. Doom himself, Nouriel Roubini, CEO of Roubini Macro Associate and professor at the NYU Stern School of Business, wrote in a recent commentary that the U.S. could fall into a recession by the end of the year. He warned investors that in the decade ahead, the world may face a "Stagflationary Debt Crisis the likes of which we've never seen before."
Roubini also said that in this environment, consumers need to invest in assets that will protect them against inflation, geopolitical risk and environmental damage.
"These include short-term government bonds and inflation-indexed bonds, gold and other precious metals, and real estate that is resilient to environmental damage," Roubini said.
Although the latest rally in gold may be short-lived, the sentiment is that investors should be focused on the long-term potential.
By Neils Christensen
For Kitco News
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