Weekly Gold Review: The FED fights inflation with all its might, macroeconomic data is poor, and gold prices remain above 1820

This week Spot gold fell by about 0.8%, dropping by approximately $15 per ounce, with a fluctuation of about 1.45%. The highest and lowest prices differed by about $26 per ounce. The drop was narrower than last week's. The Federal Reserve Chair held two hearings in Congress this week, but they did not create much of a stir in the gold market. The market reaction was relatively muted compared to last week's 75-basis-point interest rate hike by the Federal Reserve. This week, gold prices traded in the range of $1820-1850, remaining above the important $1800 level. As of press time, Spot gold it fell 0.92% to $1824.56 per ounce; US Dollar Index (104.1349,  -0.2819 ,  -0.27% ) fell 0.44% to 104.309.

Powell's Congressional Hearing Reiterates Interest Rate Hikes

Testifying before the Senate Banking Committee on Wednesday, Federal Reserve Chairman Powell said the Fed is "strongly committed" to controlling inflation and is taking "swift" action. He reiterated that he would stick to the Fed's aggressive interest rate hike plan amid stubbornly high inflation, and that the Fed's goal remains to restore inflation to 2%. US Democratic Senator Elizabeth Warren questioned the effectiveness of the Fed's interest rate hikes. She asked whether raising interest rates would help lower food or gasoline prices, to which Powell admitted it would not.

When addressing the risk of recession, Powell reiterated that the US economy is "very strong" and capable of withstanding tighter monetary policy. He added that the likelihood of a recession is "not particularly high at the moment." He explained that the aim is to achieve price stability without triggering a recession.

Testifying before the House Financial Services Committee on Thursday, Powell said that while the Fed's determination to combat inflation is "unconditional," there is only so much the Fed can do when fighting runaway price increases, and that the Fed's tools cannot solve most of the problems.

Clearly, the tug-of-war between inflation and interest rate hikes has caused market sentiment to fluctuate, depending on whether market participants focus on inflation or interest rates. This sentiment has led to the current bullish or bearish trend for gold and the dollar as safe-haven assets. While Powell's hawkish remarks in Congress put pressure on gold prices, they also heightened concerns about a US recession, as the US economic situation may be far less optimistic than he described, and a soft landing is unlikely. The volatile financial markets, moreover, there are many factors beyond the Fed's control, such as the war in Ukraine, rising food and energy prices, etc. While raising interest rates can curb some demand, it is not a panacea for all problems, and gold remains a worthwhile store of value and safe-haven tool in the current economic climate.

Federal Reserve Chairman Powell's tough talk has kept gold prices on edge for a long time, but this week's PMI figures were poor, with the manufacturing PMI falling to 52.4, well below the previous forecasts of 56 and 57. In addition, the services PMI fell sharply to 51.6, below the widely expected 53.5 and the previously reported 53.4. The US Dollar Index is expected to decline, and gold prices are expected to rebound.

Institutional Views

Invesco's chief investment strategist, Kristina Hooper, said Monday that gold prices held steady after the Federal Reserve's unusual 75-basis-point rate hike last week. This was the largest rate hike in nearly 30 years, showing the Fed's concern about inflation. She said: "Gold prices held their ground because the 75-basis-point move was a huge red flag for many investors, indicating that the Fed would push the economy into recession." She believes that even with the Fed raising interest rates, now is a good time for gold investors. As concerns about recession and stagflation intensify and dominate the overall financial market sentiment, gold prices will continue to be well supported for the remainder of the year.

The latest trade data from the US Commodity Futures Trading Commission (CFTC) on Tuesday showed that hedge funds left the gold market in anticipation of the Fed's largest rate hike in 28 years, but not by much, and market sentiment remained fairly neutral. The CFTC's disaggregated trader commitment report for the week ending June 14 showed that net long positions in gold currently stand at 36,905 contracts, an increase of nearly 36% from the previous week.

TD Securities' commodity analysts said Tuesday that, setting aside recent volatility, the Fed's plan for a large interest rate hike will still weigh on the gold market. The analysts said: "As the Fed delivered the expected 75-basis-point rate hike and the market believes the Fed may halt its tightening cycle at the first sign of economic slowdown, gold prices rose to recent highs, and net long positions in gold may increase later this week. Looking ahead, interest rate hikes should once again force gold prices and gold long positions lower."

Keith Neumeyer, CEO of First Majestic Silver, argued on Tuesday that the Fed's tough stance is unsustainable and that the world's largest central bank may not only completely stop raising interest rates before the end of the year, but will also reverse course and lower interest rates. He said the Fed's monetary policy shift could occur before the fourth quarter of 2022 and trigger another bull run in precious metals. He believes the Fed will give up on inflation, believing they cannot control it.

Seth Klarman, head of Baupost Group, said Wednesday that he believes it is valuable to hold some gold as uncertainty continues to dominate the market. Although rising interest rates and a stronger dollar pose strong headwinds for gold, Klarman said he remains a fan of gold. He said gold remains a store of value and a hedge against risk, and is valuable in times of crisis. While he expects interest rates to rise, he believes the Fed's aggressive actions are limited.

MKS PAMP's metal strategist, Nicky Shiels, said Thursday that the market has shifted as inflation concerns give way to recession fears, with equity investors opting for cash rather than safe-haven assets such as gold. Gold's volatility has been relatively low compared to other assets, as the precious metal maintains a "mild bull market," trading comfortably between $1800 and $1900 per ounce. Don't expect gold prices to rebound until market confidence is restored. She noted that one outcome that would be unfavorable for gold is if the Fed remains too hawkish.

Technical Forecast of Gold Price Trend

Gold prices have eased near $1820 and are expected to rebound, as gold shorts showed a loss of bearish momentum after testing Wednesday's low of $1820.00. In late trading in New York, gold prices fluctuated in a narrow range of $1822.67-$1825.47, currently showing some signs of breaking out of the narrow range to the upside.

From a broader perspective, gold prices fluctuated between $1821.72 and $1847.95. The 20-period and 50-period exponential moving averages (EMAs) are at $1828.30 and $1831.58 respectively, trending downward, reinforcing the bearish sentiment. Meanwhile, the Relative Strength Index (RSI) (14) shows signs of losing downward momentum. The momentum oscillator is finding support near the 40.00 level.