The precious metal is down 8% so far in 2018, and nearly 14% on an annualized basis – making it the worst-performing major asset class this year.
Gold has weakened this year alongside many emerging-market currencies because the dollar strengthened and US interest rates became more attractive. On August 13, gold fell below the key technical level of $1,200 an ounce for the first time since early 2017. It traded up 0.7% to $1,202.90 an ounce on Friday.
It may have gained by the end of the week, but it’s still a weak asset currently. Spot gold was up one percent at $1,196.39 an ounce during Friday’s trading session, about 3 percent higher than last week’s 2018 low below $1,160.00.
Growing U.S. political uncertainty, reinforced by the legal woes of two of U.S. President Donald Trump’s former advisers this week, is keeping the dollar under pressure despite tighter U.S. monetary policy, analysts say.
By Friday, 27th August, gold prices saw a rally as investors took Powell’s speech as a more dovish stance, which seemed to rule out the need for a more aggressive tightening as he suggested a lack of inflationary pressure and put the warning for further gradual increases in interest rates on a continuation of current economic strength and a strong labor market.
In his speech, Powell indicated that there was no clear sign of an acceleration above the Fed’s 2% inflation objective and said there did not seem to be an elevated risk of the economy overheating.
Gold prices traded higher on Friday as Federal Reserve chairman Jerome Powell emphasized the central bank’s plans for gradual interest rate hikes would be conditioned on the continued strength of the U.S. economy and labor market.
Higher interest rates tend to weigh on demand for gold, which doesn’t bear interest, in favour of yield-bearing investments. The remarks also weighed on the dollar, extending the greenback’s losses and increasing the demand of the precious metal for holders of foreign currencies.
As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.
Gold is usually favored as a safe haven during market turmoil, but even all the back and forth on trade between the US and China has not stirred up a bid for the metal as the dollar still hold strong.
The commodities market has been adversely impacted by the strong dollar and the discussion of a trade war possibility, which may already be happening. With the economies of America, Europe and Asia picking up, most investors are asking, why buy gold or silver? The dollar is the key. When it starts dropping, we will see the price of gold, silver and all commodities improve.
Many foreign governments and companies have borrowed in dollars, thinking the dollar will go lower relative to their own currencies. But the dollar has done the complete opposite. So now, these borrowers of $US are being squeezed as their borrowing costs have risen dramatically. This is creating financial distress in certain corners of the world. At these locations the price of gold will be seen climbing quickly.
But when will this happen? Will the dollar weaken? When will we see the gold prices going up? Will global uncertainties rise? There are many questions floating in the market currently.
And hence we all need to divert our attention to some of the developing problems that exist outside America and how it will impact America and furthermore the dollar.