Will Fed Rate Hikes Continue To Weigh Down Gold Prices?

Washington (Oct 20)  The Federal Reserve's ongoing effort to prevent the U.S. economy from overheating threatens to squash any rally aspirations among gold bugs, at least for the time being.

In September, the Fed hiked its benchmark funds rate to a target range of 2 percent to 2.25 percent, the third such increase in 2018 and the eighth since the central bank commenced its current policy "tightening" cycle in late 2015. Many analysts expect another Fed rate hike in December.

Highs and Lows

COMEX gold futures are already down about 12 percent from a 20-month high of $1,369.40 an ounce reached in April, based on the closest-to-expiration contract. In mid-August, gold fell to $1,167, the lowest since January 2017.

Meanwhile, U.S. benchmark rates keep marching higher, with the yield on the 10-year Treasury note touching 3.24 percent in early October, a 7 ½-year high. Some analysts see further downside for the gold market, as the outlook for even higher interest rates and higher "real" yields (adjusted for inflation) dampens the metal's appeal for investors.

"Real yields are really key in setting directional bias for gold," said Callum Thomas, Head of Research, Topdown Charts Limited. "Taken together, the trend of rising real yields and tightening Fed policy are likely to continue to exert headwinds on the gold price for at least the next six to 18 months. Our charts point to gold falling to at least $1,000, if not lower."

High Inflation Stokes Gold Bulls

Traders and other market professionals for decades have tracked the gold market's performance against benchmark interest rates. Many consider gold a safe-haven - gold is always going to be worth something, so it's a good place to park money during broader market turmoil, in other words. Periods of high inflation, such as the late 1970s, have also been bullish for gold, as some consider the metal to be the ultimate "store of value."

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