Gold price: even with the super-sized rate hike, gold remains a winner

Gold price is hovering around the critical level of $1,850 after rebounding from the one-month low of $1,805.59 hit earlier in the week. Even after Fed’s super-sized rate hike, the precious metal remains a viable investment amid the ongoing economic turmoil.

What’s driving the market?

For about six weeks now, gold price has been trading within a horizontal channel of between $1,800 and $1,876 as bullish and bearish forces continue to impact the market in equal measure. Indeed, major news such as nonfarm payrolls, US CPI, and the most recent Fed interest rate decision have not yielded enough momentum for a breakout.

Are you looking for fast-news, hot-tips and market analysis? Sign-up for the Invezz newsletter, today.

On Wednesday, the Fed rolled out a large yet expected interest rate hike as the central bank strives to deal with the heightened inflationary pressures. The approved rate increase of 75 basis points is the highest ever recorded in over 25 years. This super-sized hike comes less than a week after data from the US Labor Department showed that consumer prices in the country had risen to a fresh 40-year high of 8.6% in May.

Following the Fed interest rate decision, the bank’s chair -Jerome Powell noted, “today’s 75 basis-point increase is an unusually large one and I do not expect moves of this size to be common”. On the one hand, an environment of higher interest rates tend to weigh on gold price while boosting the US dollar and Treasury yields.

As at the time of writing, the benchmark 10-year yields were at 3.25% as investors digest the Fed’s rate decision. Notably, it has held steady above 3.20% since the beginning of the week. Prior to that, that support level had been evasive since November 2018. Indeed, prospects of a supersized hike boosted the Treasury yields to a level last recorded in April 2011.

Even with the environment of higher interest rates, which has been a key bearish driver for gold price, the precious metal remains a viable investment due to its status as a safe haven and hedge against inflation. Indeed, these characteristics are what has sustained it above the critical level of $1,800.

As stated by Jim Cramer, the host of CNBC’s Mad Money, gold is a reliable investment during such times of heightened inflationary pressures. While its returns may be lower than those of riskier assets such as crypto and equities, it “holds its value in a recession”.

Amid the ongoing economic turmoil, this perspective may be what triggers a breakout. If that happens, the zone around $1,890 will be one to look out for.