Dollar falls after hitting twenty-year high, resulting in solid gains for gold

Spread the love

During the March FOMC meeting, the Federal Reserve raised its key fed funds rates by 25 basis points, marking the Fed’s first rate hike since 2018. This was the beginning of the Fed’s shift from a extremely accommodative monetary policy to a monetary tightening policy. The Federal Reserve would continue to raise rates at each of the three FOMC meetings that followed. In May, the Fed raised rates by 50 basis points, 75 basis points in June, and another 75 basis points in July. This raised the cost of capital loans from practically zero to 2 ½%.

With inflation rising at the highest pace in 41 years, the Federal Reserve was slow to initiate a series of rate hikes and had been behind schedule for too long. The biggest mistake made by the Federal Reserve was its assumption that rising levels of inflation were transitory and would naturally dissipate in a relatively short period of time. The fact that the Federal Reserve was wrong in their assumption would force them to initiate an extremely aggressive series of rate hikes in a short period of time.

The graph above produced by Statista plots the 12-month inflation rate from January 2020 to July 2022. It clearly shows that when the Federal Reserve initiated its first interest rate hike, the CPI or headline inflation had already reached 8 ,5 %. Furthermore, it underscores how long the Federal Reserve turned a blind eye to runaway inflation with steady, consecutive increases month after month.

In April of this year, following the Fed’s prime rate hike, inflation had a fractional decline from 8.5% to 8.3%. By the time the Federal Reserve raised rates three times, inflation continued to rise, peaking in June at 9.1%, a level not seen in 41 years. The first significant drop in inflation occurred last month, when the CPI went from 9.1% to 8.5% in July.

At the same time, the dollar index rose from 99.26 in March to its highest closing value in 20 years yesterday when the dollar index closed at 108.965. This also had a dramatic bearish impact on gold, which peaked in March this year, trading at $2,077, to its lowest value for 2022 on July 21, when gold futures hit a low of $1,680.

The chart above is a two-month Japanese candlestick chart of the dollar index. Identifies the last two times the dollar has traded at this value. The first occurrence was in 2000 when the dollar index broke above 109 and traded to a high of about 120. The second instance was during the correction that occurred immediately after hitting 120 in 2003.

The chart above is a daily candlestick chart for gold futures. As of 5:45 pm EDT, the most active contract for December 2022 is pegged at $1,761.10 after taking into account today’s gain of $12.70 or 0.73%. The dollar index declined 0.47% today meaning it accounted for about half of gold’s gains with the remaining gains being directly attributable to market participants who bid higher on the precious yellow metal.

For those who would like more information, simply use this link.

Wishing you good business as always,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has gone to great lengths to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.

#Dollar #falls #hitting #twentyyear #high #resulting #solid #gains #gold

Leave a Comment

Your email address will not be published.