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How will interest rate hikes affect gold prices in 2022?

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Gold had quite a rocky year in 2021, with the worst crash in six years. This happened despite rising inflation, which ideally should have made gold more attractive to investors as a traditional inflation hedge. However, aside from a few ups here and there, the metal has not performed as expected.

Recently, the US Federal Reserve indicated in the minutes of its December meeting that it would likely raise interest rates in the near future to curb soaring inflation. Inflation has reached multi-year highs in the United States and the euro zone, following numerous stimulus measures implemented during the pandemic.

This required a decisive decision from central banks now. The Bank of England was the first to tighten monetary policy, followed quickly by the US Fed, as US inflation recently hit a three-decade high. Speculation that the US Fed will implement at least three, possibly four rate hikes this year is ongoing.

Rising rates on the horizon

With interest rate hikes soon on the horizon, investors are speculating on the impact they will have on gold prices this year, given gold’s recent performance. The metal hit an all-time high in August 2020 at $2,000 an ounce, but has struggled to recoup its gains since, despite steadily rising inflation.

Historically, when interest rates rise, gold prices fall as investors shift to other asset classes offering higher yields, such as bonds or stocks. Whether that will continue to be the case for gold this year remains to be seen, as the exact timing of Fed interest rate hikes is still unknown.

However, sentiment for the precious is, for now at least, quite positive as prices continue to rise, recently hitting a one-week high.

Gold shows resilience

According to Craig Erlam, Senior Market Analyst at OANDA, “Ordinarily, higher interest rates should put downward pressure on gold prices, which makes recent activity in the yellow metal all the more interesting. It has strong support despite tightening not only priced in, but at a pace not seen since the financial crisis. While I continue to believe the fundamentals will be too big of a barrier for gold this year and prices will pull back, current price action is impossible to ignore and it may continue to show strong resilience. for a certain time.

Although the medium to long-term sentiment looks quite bearish, as evidenced by the comment above, the short-term outlook looks quite positive as investors are still hopeful that gold can recover some of the ground it has. lost in the last year.

Nicholas Cage, strategist of DailyFX, believes that “gold pushes back towards a resistance noted between 1,830 $/oz. and $1,836/oz”. Although the metal has also faced significant resistance in this range over the past year, investors continue to hold out hope that this is the year it will finally break through this traditional barrier. If that happens, it’s likely the metal will also hit last November’s high of $1,877 an ounce, which could set the stage for further gains, at least until interest rates ease. tighten more.

Dollar weakness

Cage goes on to explain that “the precious metal is taking advantage of a bout of US Dollar weakness as traders undo their aggressive bets on the greenback.With the British pound steadily rising against the dollar in recent days, this trend may also continue in the near future.

In a report published on the company’s website, Carlo Alberto de Casa, market analyst at Kinesis Money, believes that “Despite market expectations that interest rates will rise significantly in the coming months, investors show a significant interest in gold”.

He also thinks that if gold can only clear the resistance zone around $1,830-$1,832, this year could see more recoveries, while a drop to around $1,800 could signal further distress. .

On the other hand, the rise of Bitcoin and other digital assets, such as NFTs, could also associate with interest rates and contribute to lower gold prices this year, as more and more many investors turn to them as inflation hedges. This is a trend that is largely expected to continue to grow this year as more cryptocurrency-related ETFs make their way into the market and investors have more choice as to how. and the form in which they wish to invest.

However, there are also other dynamics, such as supply chain factors, demand, and the progression of the pandemic, which must be considered while factoring in interest rate hikes in prices. gold this year.

Read more: Gold price prediction for 2022 and beyond: Buy, hold or sell?

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