Gold slumps to 6-month low even as inflation fears rise. Here’s why bullion is out of favor

Gold fell to a six-month low on Thursday as investors abandoned a once-hot trade on concerns that higher inflation will likely force the Fed to raise interest rates later this year or at least keep them steady.

But there are other factors at play.

August gold futures It reached $4,046.20 per ounce on Thursday, its lowest level since November. This week alone, gold lost 6.3%, marking its second straight weekly loss and its worst week since mid-March, when gold fell 9.62%.

It last decreased by 0.5 percent to $4,111.10 per ounce.

Fed’s comeback

As a safe-haven asset, investors turn to the yellow metal in times of market uncertainty, hoping it will act as an alternative. Protection against inflation. But because gold has no yield, the metal is also particularly sensitive to expectations about long-term real interest rates.

The Iran war, which is in its fourth month, has increased inflation by causing energy and other prices to rise.

Consumer inflation in the US in May reached its fastest increase in the last three years, mainly due to the increase in prices of energy-related products. With May employment reports coming in stronger than expected, expectations have increased that the Fed may need to raise interest rates by the end of the year to slow down price increases.

Next week, the Fed is expected to keep its benchmark lending rate steady between 3.50% and 3.75% at Kevin Warsh’s first meeting as Fed chairman. The majority of economists polled by Reuters expect interest rates to remain unchanged this year, after many predicted multiple rate cuts to start the year.

Traders are less optimistic, currently pricing the probability of a Fed hike by December at 67%. CME Group’s FedWatch tool.

Higher rates could make dollar-denominated assets like Treasuries more attractive if it would help prevent inflation.

technical malfunction

According to price chart analysis, the overall technical picture of gold remains weak.

Gold recently fell below the 200-day moving average for the first time since September 2023, which Citigroup flagged as a major negative signal. The bank has been cautious about gold in the near term since the war escalated in March, partly due to high energy costs resulting from the closure of the Strait of Hormuz.

In the long term, Citi continues its upward trend.

“While market participants grapple with the short-term outlook heavily dependent on the Strait of Hormuz outcome, constructive consensus remains on strong counter-cyclical demand in the medium to long term due to increasing global geopolitical fragmentation, ongoing sovereign debt and depreciation concerns, and the ongoing trend of central bank reserve diversification,” Citi analysts wrote. he said.

Withdrawing from the ‘stone drop trade’

JPMorgan sees a broad-based pullback on the “trade of adulteration” by retail and institutional investors.

This trade withdrawal, which began to emerge a few weeks ago, has continued in recent weeks.

The bank noted weak futures positions due to outflows from gold exchange-traded funds and growing concerns about the size of the government deficit, the long-term inflation environment and increasing geopolitical uncertainty since 2022.

“Our momentum signal framework also points to a continued pullback from the depreciation trade. The pattern seen since the beginning of the Iran conflict is similar to ETF flows and futures positioning representation,” the bank said.

JPMorgan’s analysis shows gold ETF outflows of around $20 billion in the week to June 5, following modest inflows in the previous week, while Bitcoin ETFs recorded gradually increasing outflows over the previous four weeks.

In the futures space, investors continued to mitigate the risks of depreciation trading. The bank noted that discounts on gold started at the end of February and have remained constant since mid-April.