Gold futures reached a fresh intraday high on Wednesday afternoon, following the Federal Reserve's announcement to raise its benchmark interest rate. While this was expected, the central bank also indicated that there could be further rate hikes in the future.
George Milling-Stanley, chief gold strategist at State Street Global Advisors, highlighted that the official Fed statement did not provide any indication of when the rate hikes might pause, like they did in June, or when rate cuts might begin. As a result, the price of gold strengthened by over $10 an ounce immediately after the announcement.
In electronic trading, August gold was valued at $1,976.30 per ounce and even reached as high as $1,979.90 after the Fed announcement. This marked the highest intraday level for a most-active contract since July 20.
Prior to the central bank's decision, gold prices had already risen by $6.40 (0.3%) to settle at $1,970.10 on Comex Wednesday.
It is worth noting that higher interest rates tend to strengthen the U.S. dollar and make gold more expensive for foreign buyers. Additionally, higher interest rates increase the yield on Treasury bonds. However, this was not the case on Wednesday afternoon.
After the Fed announcement, the ICE U.S. Dollar index, which measures the dollar's strength against major currencies, fell nearly 0.4% to 100.99. This provided support for the prices of gold denominated in dollars. The yield on the 10-year Treasury also dropped from 3.911% on Tuesday to 3.8579%.
Will Rhind, founder and CEO of GraniteShares, mentioned that not much changed from the Fed's previous rate hike in May, but he did feel that rate hike was unnecessary. In June, the central bank opted to keep the benchmark interest rate unchanged.
Overall, the Fed's decision to raise its benchmark interest rate and the lack of clear guidance on future rate hikes or cuts have contributed to the rise in gold futures.
The Fed's Outlook on Interest Rates and the Labor Market
According to Rhind, it is highly likely that we have witnessed the final rate hike of this cycle. With inflation dropping to 3% and interest rates reaching their highest point in over two decades, the sense of urgency from the Fed has diminished significantly compared to previous meetings.
Additionally, the labor market is weaker now than it was at this time last year, as noted by the Fed. The July employment report, set to be released on August 4, will provide further insight into this matter.
While the central bank remains driven by data, the market holds a cautious optimism regarding the potential for controlled inflation and a path towards lower rates.
During his press conference, Fed Chairman Jerome Powell emphasized that the central bank would carefully evaluate additional information on inflation, employment, and economic growth before deciding on its next course of action. Powell made it clear that the Fed would keep its options open.
Powell suggested that depending on the data, there is a possibility of another rate hike in September or the maintenance of current rates.
Overall, the Fed has left investors pondering whether there is another rate hike on the horizon. However, regardless of the answer to this question, it seems that the market has come to recognize that this rate hike cycle has reached its peak. Brien Lundin, editor of Gold Newsletter, stated that gold, in particular, appears to have already hit its lowest point this month and is now factoring in the likelihood of future rate decreases.
Lundin further commented, "Considering that it's only a matter of timing for the downside of this cycle to occur, gold seems to be an exceptional value at its current levels."