Inflation and Interest Rate still a headwind for bullion

The Federal Reserve had a challenging year. The inflation estimates issued by the Federal Reserve of the United States were embarrassing. It predicted 2.6 percent PCEPI inflation in December 2021, but it reached 6.8 percent in June. Mr Powell and his colleagues face significant hurdles ahead of them. They’re stuck between a rock and a hard place. The rock, of course, is inflation, which was created by the massive rise in the money supply in response to the outbreak. It is intolerable at its current level, which is above 8%, and must be reduced. However, the rock is an economic slowdown. The Fed’s tightening cycle continues, but it may be overconfident about the job market and overall economy.

 

The Fed’s trap, on the other hand, is fundamentally beneficial for gold. For the time being, the Fed remains somewhat hawkish, which supports the currency and puts gold under pressure. However, when the unemployment rate rises and the next economic crisis occurs, the Fed will be forced to change course and return to a dovish attitude as a lender of last resort. Many analysts are suspicious about the dovish tilt, but history suggests otherwise, especially given the magnitude of private and public debt.

Gold is trapped between not seeing a pivot anytime soon and seeing a light at the end of the tunnel in the way of the Fed slowing. In the medium term, gold is more likely to rise than fall. We will see unfavourable effects in global economies, which may finally tip the scales in favour of rate reduction. Traders anticipate a fourth consecutive 75-basis-point hike at the end of the Fed’s Nov. 1-2 meeting. Because the recession is expected to be accompanied by continued high inflation, the macroeconomic climate will be extremely stagflationary, which should support metal prices via low real interest rates and increased demand for gold as an inflation hedge.

 

 

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