Gold has
lost its function as a safe haven asset over the course of recent years as its
prices have been seen to move in the same patterns as typical risky asset from
the start of the pandemic and the beginning of the vast monetary stimulus
delivered by major central banks and governments, and foremost by the Federal
Reserve (Fed). Cheap money at almost zero rates amplified by stimulus programs mostly
affected industrial and energy assets while undermining the low-yield
Dollar-denominated debt. Investors were therefore seeking higher returns from
other assets, including gold. Gold prices rose from March 2020 lows at $1450
per troy ounce to the peak at $2077 in March 2022.
The Dollar and
debt yields rose in 2022 mostly as a result of the Fed raising interest rates. The prices of the bullion dropped to $1616 per
ounce in November 2022. This clearly demonstrates the primary nature of gold as
a financial asset that moves in the opposite direction to the Dollar. So, gold
prices and stocks started to recover amid expectations of a possible slowdown
of interest rate hikes by the Fed. Gold prices rose to $1949 per ounce by January
26, and stepped back by the end of January as the euphoria surrounding the
expectations that the Fed may take a less hawkish approach to its interest rate
hike faded. Such expectations are have already been priced in by more than
enough as investors expect the Fed to raise interest rates by 25 basis points
to 4.75% on February 1. This is not even a U-Turn of the Fed’s monetary policy.
Gold prices
are losing traction as they fell to $1906 from $1921 per ounce on the eve of D-day.
The Fed’s decision may direct gold prices, not only for this week but they may set
a trend for the whole of February. If the monetary watchdog continues with its
ultra-hawkish rhetoric, gold prices may continue their downside correction to
$1900 per ounce, and possibly further down towards the $1820-1830 strong
support levels. If investors suspect that the Fed may plan to ease its monetary
tightening in the near future, prices may continue to test levels at $1950-2000
per ounce in the coming weeks.
Disclaimer:
Analysis and opinions
provided herein are intended solely for informational and educational purposes
and don't represent a recommendation or investment advice by TeleTrade.
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