Gold futures gain $16.60 but upcoming rate hikes could limit any sustained rally

As of 5:05 PM EDT gold futures basis, the most active December contract is currently fixed at $1729.50 after factoring in today’s gain of $16.60 or 0.97%. Dollar weakness was a primary contributor to moving gold higher accounting for approximately 60% of gold’s $17 price increase. Currently, the dollar index is fixed at 109.55 which is a daily decline of 0.59%. Considering that gold gained just shy of 1% simple math indicates that market participants were active buyers accounting for approximately 40% of today’s price advance.

Spot gold pricing had similar gains in trading today. After factoring in today’s gain of $15.70 physical gold is currently fixed at $1717.90 according to the KGX (Kitco Gold Index). Just as in gold futures gains in physical gold occurred as a combination of dollar weakness and normal trading. Dollar weakness accounted for $10.40, with the remaining gain of $5.30 attributable to market participants bidding the precious yellow metal higher.

Gains today in both gold and silver are the byproduct of the dollar softening from the record levels seen over this last week as the dollar index traded and closed above 110. Recent strength in the dollar can be attributed to rising yields in U.S. debt instruments. Yields in U.S. Treasuries softened today which led to a decline of the dollar which was highly supportive of today’s gains in the precious metals.

However, the probability that today’s gains can be sustained is muted given that the consensus that the Federal Reserve will raise rates by another 75 basis points at the September FOMC meeting is high. According to the CME’s FedWatch tool, there is a 74% probability that the Fed will raise rates by 75 basis points and a 26% probability that they will raise rates by 50 basis points at their September meeting. The CME’s probability indicator was at 73% yesterday and 68% one month ago on August 5, 2022.

According to the Wall Street Journal, “The Federal Reserve appears to be on a path to raise interest rates by another 0.75 percentage point this month in the wake of Chairman Jerome Powell’s public pledge to reduce inflation even if it increases unemployment. Fed officials have done little to push back against market expectations of a third consecutive 0.75-point rate rise in recent public statements and interviews ahead of their Sept. 20-21 policy meeting.”

The Federal Reserve has raised interest rates this year at the most rapid rate since the 1980s. Since March of this year, the Federal Reserve has taken interest rates from near zero to between 2 ¼ % to 2 ½ % in July. Currently, it is believed that the goal of the Fed is to move interest rates close to 4% by the end of 2022. This hawkish tone of the Fed could certainly limit any sustained upside move in gold.

Wishing you as always good trading and good health,