Gold slumps to lowest since March 2021, dollar strength likely to continue

Gold is heading into the second half of the year under increasing pressure, with the dollar more than ever the dominant driver.

The precious metal has already seen a lot of volatility in 2022, rallying to a near record in March after the crisis in Ukraine, only to lose about 18 per cent since then as the Federal Reserve tightened monetary policy and the US currency soared on the back of rising interest rates, haven demand and recession fears.

One gauge of the greenback hit an all-time high on July 14, and bullion priced in dollars fell to its weakest intraday level in more than 15 months on Thursday, with the inverse correlation between the two assets around the strongest level since September. While real rates can be a strong driver of gold at times, that’s not the case now, said John LaForge, head of real asset strategy at the Wells Fargo Investment Institute.

“It’s all the US dollar,” said LaForge. “As for recession, I think gold gets bid some, but nothing substantial. Gold appears to be in a bit of a holding pattern between $1,650-$1,850. Which way it breaks from here, I believe, will be US dollar-led.” Spot gold fell as much as 0.4 per cent to $1,690.16 an ounce on Thursday.

UBS Group AG’s wealth management unit has cut its gold forecasts to $1,600 at end-September and end-year from $1,800 and $1,700. Citigroup Inc. also flagged a potential drop to around $1,600 at some point in 2022.

Gold has lost more than $110 in July alone as traders increased bets on a full percentage-point increase in US rates after the consumer price index in June came in with a scorching 9.1 per cent annual gain. That’s been dialed back as policy makers expressed reluctance about such a big move.

The Fed is now expected to hike by 75 basis points for a second straight month when it meets later in July. The rest of the tightening cycle will depend on prevailing economic data and any evidence that prices are stabilizing.

“Dollar strength is likely to continue,” said Kristina Hooper, chief global market strategist at Invesco. “The Fed’s relative hawkishness versus other major central banks should help support the dollar.” But there may “be bouts of popularity” for the precious metal if geopolitical tensions increase or inflation doesn’t peak soon, she said.

Both Citigroup and UBS see prices reaching a trough this year before rallying in 2023. A drop to the $1,600 level is likely to be short-lived and attractive for investors, Citigroup analysts including Aakash Doshi said in a July 12 note.

Others remain confident in the metal’s role in a portfolio for diversification benefits. “Gold has done better than US cash holdings in real terms during this period of volatility, and even better in other currencies.” said Evy Hambro, global head of thematic and sector-based investing at BlackRock Inc.