FX.co ★ Mountains of Gold: the impact of the Fed and Gold rates on $5000

The yellow metal is actively increasing its potential, using the unstable geopolitical situation for its own benefit. Gold received strong support from the Federal Reserve after the rate hike. Against this background, the strategists of the precious metals market have become more active, promising gold the so-called "golden mountains" in the form of a price increase to $5,000 in the long term.

The upward trend of the yellow metal was launched in the middle of this week after summing up the results of the Fed meeting. Recall that the central bank raised the key rate by 75 bps and revised the forecast for the inflation rate in the United States, raising it for the current year from 4.3% to 5.2%. According to analysts, the "sunny" metal is an inflation hedge for investors, so expectations of further inflation growth are positive for gold.

Gold rose by 1% on Thursday, June 16, amid market volatility. The rise of the yellow metal was facilitated by the weakening of the US currency by 1.6%. The USD subsidence offset the pressure after the Fed's interest rate hike. As a result, the spot price of gold increased by 0.9%, reaching $1849.68 per 1 ounce. At the same time, precious metal futures on the COMEX exchange rose by 1.7% to $1849.90 per 1 ounce. Gold was trading in the range of $1846-$1848 on Friday, June 17, confidently holding the positions won.

With regard to the Fed's current strategy, many market participants are positive. However, some believe that the central bank is a little late with raising rates, so now it is difficult for it to curb high inflation. In the current situation, the Fed is ready to fight the acceleration precisely by raising the interest rate, which puts pressure on gold quotes. Interest in gold as a safe haven asset may weaken significantly if the Fed manages to keep inflation within certain limits without provoking a recession in the United States.

Negative trends in the economy that significantly affect the price of gold, notes Robert McEwen, owner of McEwen Mining Corp. He doubts the Fed's ability to take inflation into its own hands even with a further rise in rates. "With its monetary expansion and low interest rates, the Fed has created a monster. It will take a lot of time to tame it," emphasizes the strategist of the precious metals market. Against this background, a soft landing of the American economy is unlikely. "A serious correction of the financial market is expected over the next year or two," concludes McEwen.

During the period of economic and geopolitical turmoil, the head of McEwen Mining Corp. recommends investing in gold, considering it a reliable way to save capital. According to McEwen's calculations, in the next two to three years, the yellow metal will soar to $5,000 per 1 ounce. This forecast looks fantastic and far from the real price of gold, but experts do not exclude the possibility of its implementation in the long term.

McEwen's point of view is largely supported by Adrian Day, Chairman and CEO of Adrian Day Asset Management. The precious metals market strategist is confident that the Fed has enough ways to bring high inflation under control. At the same time, the expert draws attention to the risk of recession in the American economy. According to Day's forecast, stagflation is possible in the US economy in the near future (that is, a recession accompanied by high inflation). In order to avoid financial losses, investors should hedge risks and stock up on physical gold, shares of gold mining companies, energy carriers and other commodities.

Not only investors, but also many states are following the path of accumulating gold reserves. According to experts, the interest in replenishing gold reserves from developing countries is explained by the desire to minimize risks in the event of another crisis. An important driver of gold purchases by emerging markets states is a decrease in confidence in world currencies – the dollar and the euro. According to the reports of the World Gold Council (WGC), Egypt (44 tons), Turkey (42.5 tons), India (7.2 tons) and Argentina (7 tons) made the most gold reserves in four months of 2022. Among developed countries, the largest reserves of precious metals are in the USA (8,134 tons, 69%), Germany (3,358 tons, 68%), Italy (2,452 tons, 65%) and France (2,437 tons, 60%). In Russia, the volume of gold reserves is 2,299 tons (22%).

According to analysts, this trend will continue in the near future. Gold prices are supported by expectations of a global recession, which are complemented by record inflation and geopolitical tensions (in particular, the Russian-Ukrainian conflict, the lack of compromise between the United States and China over Taiwan, etc.). Experts draw attention to possible serious changes in the global financial system, which imply a decrease in the influence of the greenback and the strengthening of regional currencies (in particular, the yuan, ruble and rupee).

The purpose of large-scale purchases of gold by a number of states is not only to diversify reserves, but also to protect against inflation. At the same time, the yellow metal competes with other protective assets – deposits in USD and US Treasury bonds. Recall that the strengthening of the greenback and the increase in interest rates reduce the demand for the precious metal, and vice versa.

According to experts, gold will remain under pressure in the coming months, as the Fed will continue to raise the rate (up to 3% by the end of 2022) and withdraw dollar liquidity as part of the quantitative tightening program ($0.5 trillion). Experts expect the gold price to remain in the target range of $1,760-$1,950 per 1 troy ounce until the end of 2022.

In the process of changing the global financial system and active attempts to move away from the dollar, the volume of gold reserves in the reserves of states and in the portfolios of investors will increase. At the same time, the high demand for the yellow metal will remain in force, experts are certain. Most analysts agree that by 2025 gold will rise in price to $2,500 per 1 troy ounce.