Gold Returns Above $1700: The Worst Is Behind Us?

from Silver Doctors:

It seems that markets are more and more worried about the risk of…

by Arkadiusz Sieron of Sunshine Profits

Gold is back above $1,700. Is this a false rebound or a sign that the worst is behind us?

Gold has returned above $1,700! The chart below shows the recent rebound in gold prices. Does it mean that the worst is behind us and now the yellow metal can only go up?

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Well, such conclusions would definitely be premature. Let’s remember that September was really awful for the gold bulls, as the average monthly price plunged 4.7% compared to August. The price of gold slid below $1,700 amid strengthened expectations of a more hawkish Fed, and then the actual FOMC meeting pushed gold prices down even further. This is because the Fed delivered another 75-basis point hike and also boosted its projections of the federal funds rate from 3.4% and 3.8% to 4.4% and 4.6% in 2022 and 2023, respectively.

As a result, for the first time since 2008, the federal funds rate exceeded 3%. As the chart below shows, the current tightening cycle is the fastest in more than 40 years, which couldn’t be without negative consequences for the gold market.

A Decline in Yields Helps Gold

Despite all these headwinds, gold managed to return above $1,700. This is thanks to the decline in real interest rates. As the chart below shows, the yields on 10-year TIPS have moderated somewhat recently, which helped gold catch its breath.

It seems that markets are more and more worried about the risk of excessive tightening of monetary policy and its consequences for the economy. According to Morgan Stanley, dollar liquidity in the United States, Europe, Japan, and China has declined by $4 trillion since March and is falling fast. As the chart below shows, financial conditions – although far from being in a panic mode – have tightened significantly this year. The Chicago Fed’s National Financial Conditions Index moved from -0.74 in mid-2021 to almost 0 (positive values of the index indicate financial conditions that are tighter than average).

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