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Last week, the US Fed raised interest rates by 50 basis points for the first time since 2000. The regulator had no other option but to resort to the aggressive move due to the record 40-year high inflation rate in the country.
The hawkish Fed triggered a rally in the greenback and bond yields and harmed the current gold prices.
The precious metal has been bearish for 3 weeks in a row, marking its longest fall since December. It was also on a losing streak at the beginning of this week.
Yesterday, gold futures for June delivery closed at $1,858.60, dropping by 1.3% or $24.20 from the previous day. It marks the asset's worst performance since May 2.
Silver also tumbled by 2.5% to $21.820.
A plunge in the market of precious metals came after another rise in demand for the US dollar. The greenback is getting even more attractive to investors as the Fed continues to tighten its monetary policy.
US stocks plunged on Monday amid growing stimulus concerns. The S&P 500 dived by 3.2% to close below 4,000 points for the first time since late March 2021.
Amid the fall in the stock market this year, the greenback enjoys higher demand as a safe haven than gold.
The US dollar index has soared by more than 8% since January. Meanwhile, gold has gained just 2.5%.
Gold is expected to continue being bearish under pressure from the dollar that is getting stronger due to the Fed's aggressive moves.
Will monetary policy tightening in the US trigger a collapse in the gold market in the long term?
In order to answer this question, let's assess how gold traded during past rate-hike cycles by the Fed.
The US regulator raised rates at a faster pace in 1980, 1987, and 1994 and at a slower pace in 1977, 1999, 2004, and 2016.
Rate hikes at a faster pace imply:
– a 50 basis points rate increase at the initial stage– rate hikes of more than 300 basis points during a year– rate hikes between FOMC meetings– higher fed funds range
As previous performance shows, gold tarded 32% lower than before the tightening in 5 years after faster rate increases.With that in mind, the bullion could be worth around $1,300 by 2027 if the Fed takes a more aggressive stance on monetary policy.
Rate hikes at a slower pace imply:
– cycle with a gradual increase in the indicator by 25 basis points– a few rate hikes within a year– lower fed funds range
Every time the Fed raised interest rates at a slower pace, gold used to trade higher.
On average, the asset strengthened by 115% in 5 years after slower rate increases.
Thus, the precious metal may soar above $4,000 by 2027 if the Fed is cautious.
Whether it will be a faster or slower rate-hike cycle this time depends solely on the results the Fed wants to achieve: stop persistent inflation or simply tame it.
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