After an explosive beginning of the month, the gold prices appear to have pulled on routine profit-taking as traders now shift their attention to the minutes of the Fed Reserve’s latest monetary policy meeting.
In the past 12 months, inflation has quickly spread to all corners of the economy with the cost of unavoidable living expenses from fuel, food, clothing, housing, and energy prices – increasing at double-digit annual rates for the first time in more than 40 years – further worsening the cost of living crisis and heaping lots of pain on household budgets.
A series of recent much hotter-than-expected inflation readings seem to have enviably spurred the Federal Reserve’s efforts to restore market and price stability that increased in June after officials decided to abandon previously-laid plans to implement a half-point interest rate hike. Instead of that, it dropped a bombshell on the markets by increasing interest rates by a massive 75 basis points.
In July, the Federal Reserve increased interest rates by another huge 75 basis points for the second consecutive month. The most recent rate hike means the central bank is in the thick of the most aggressive cycle of monetary tightening since 1981.
It follows a 50 basis point rate hike in May and a 75 basis points rate hike in June, which is the first of that magnitude since 1994. There is no denying that we are currently in an environment, where the Federal Reserve is provided with a difficult choice: the risk of recession or record high inflation. Faced with that situation, the Fed’s recent actions clearly show that they have settled on a recession.
After increasing interest rates by a staggering 200 basis points at its past three consecutive meetings, Fed Chairman Jerome Powell highlighted that another massive hike may be on the cards for September. These odds hardened on August 16 after Natural Gas prices on the two sides of the Atlantic exploded through all-time record highs.
In that context, European Natural Gas prices increased to reach a high of €251, while U.S Natural Gas prices exploded above $9.45 – recording a staggering gain of at least 350%, from 12 months ago. Putting it another way, that is the equivalent of both the benchmark futures contracts that are now trading at over $400 per barrel of oil.
Gold Gains As Recession Fears Increase
As traders know – there is a major correlation between Inflation and Energy prices. When the energy prices increase at a red-hot speed, inflation follows them closely.
Even Jerome Powell admits that:
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“One of the biggest challenges faced by the Federal Reserve, which they really can’t do anything about it – is elevated Oil and Energy prices”.
Focusing ahead, all eyes will be on the Federal Reserve’s July Monetary Policy Meeting (FOMC) Minutes, scheduled for release on August 17, 2022.
With inflation seemingly spiraling out of control, expectations are now running high that the Fed may be compelled to raise interest rates aggressively once more in the coming month. Traders will be reviewing every word of the minutes for clues on the size of the Fed’s next rate hike, which will probably open the door for fresh volatility ahead.
Where are the gold prices going next?