Gold Plunges to a 30-Month Low on a Strong US Dollar
Gold Plunges to a 30-Month Low on a Strong US Dollar

By Bryan Jung

The price of gold fell to a 30-month low on Sept. 26, due to the growing strength of the U.S. dollar and rising Treasury yields against foreign currencies.

This comes amid further prospects of aggressive interest rate hikes by the Federal Reserve and other major central banks in their fight to defeat inflation, causing gold prices to reel in recent weeks.

“Rising government bond yields and a soaring U.S. dollar index are the main bearish elements driving the precious metals markets south,” said Jim Wyckoff, Kitco senior analyst, in a note to clients.

Spot gold was down at $1,636.90 per ounce, after falling earlier to $1,626.41 in the Asian trading session, at its lowest level since April 2020.

U.S. gold futures fell to $1,645 per ounce.

Gold prices have tumbled more than $400, at around 20 percent, since the end of the first quarter.

Prices had earlier hit the key $2,000 per ounce mark back in March, after the Fed made its first initial benchmark policy rate hike in a reversal of its earlier easy monetary stance.

U.S. annual inflation rates were at 8.3 percent in the latest report from August.

The central bank hiked interest rates last week by 75 basis points, and it hinted that more increases are to come until inflation was lowered to its 2 percent target.

The markets are anticipating two additional hikes in November and December.

The dollar index rose to highest peak since 2002, after surging past rival currencies, led by a massive drop in the British pound, which made gold more expensive for its foreign peers.

Benchmark 10-year Treasury yields climbed to their highest level since 2010, at 3.762 percent, which raised the opportunity cost of holding gold, which does not bear interest.

The Future of Gold Investments

A rise in U.S. interest rates normally weakens value of gold while strengthening the dollar and U.S. bond yields.

Higher U.S. interest rates tend to dull the zero-yielding bullion’s appeal while bolstering the dollar in which gold is priced.

Many analysts said that while the drop may dissuade many from investing in gold, this may creating a great buying opportunity for the precious metal, especially if it falls below $1,600 an ounce.

The SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell to 30,454,517 ounces at the end of last week, its lowest since March 2020.

“We’ve seen significant increases in the markets’ estimates of what the federal funds rate will do over the next year. It is quite a big difference from a month ago, and it is in line with the Fed being more aggressive,” Bart Melek, TD Securities global head of commodity markets strategy, told Kitco News on Sept. 23.

“The real rates are rising. That’s negative for gold. The high cost of carry and high opportunity cost will probably drive capital away.”

However, Melek said that gold would become a safe haven again once the economy begins to slow and inflation starts to decelerate, ending the Fed’s hikes, which in turn will lessen the appetite for equities.

“Once we start seeing inflation moving into a more benign type level, the Fed can quickly turn. As they went from dovish to hawkish, they can go the other way. But it is unlikely anytime soon,” said Melek.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, told CBS’s “Face the Nation,” on Sept. 25, that he still believes the central bank can tame inflation with job losses “smaller than what we’ve seen in other situations” and avoid severely damaging the economy.

He believes that the strong job market will give the economy the ability to absorb any rate hikes.

Billionaire investor John Paulson, in an interview with Bloomberg over the weekend, still touted gold as a hedge against inflation, given its smaller decline relative to stocks and bonds.

He suggested that the metal could rise in value if the Fed’s move to boost interest rate hikes fails to crush inflation.

He warned that investors may lose faith in the central bank and that its long-term inflation expectations could rise, leading to a demand for gold as a hedge.

Meanwhile, spot silver was flat at $18.85 per ounce, after falling to its lowest level in more than two weeks earlier in the session.

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