After reaching its highest level of the year above $2,070 in March 2022 at the beginning of the Russian invasion of Ukraine, the price of Gold started falling afterwards. It has been trading within a downward trend for the past seven months (see the red channel in the below chart), as the Fed sharply increased its key interest rates and inflation reached record-levels around the world. After reaching their lowest level at about $1,617 earlier this month, Gold prices rebounded and broke out of the bearish channel that they had been caught in since March 2022.
While investors are now wondering if the price of Gold will continue falling for an 8th consecutive month or if it will start reversing, it is important to note that there are ways to take advantage of all market movements, be they bullish and bearish. Trading financial products like CFD (Contract For Difference) on Gold with a serious and professional CFD broker like easyMarkets can help you trade Gold over the short term.
Gold prices have increased by approximately 5% so far this month
After losing more than 22% since its highest level of March 2022, Gold prices are up almost 5% in November and the technical configuration is globally positive, which means that prices could be about to rebound. In addition to having broken out of the bearish channel upwards, prices are hovering around the upper part of the Ichimoku bearish cloud while forming a bullish reversal pattern – a double bottom (see the pattern in black in the form of a W). The Relative Strength Index (RSI) is also rising above its neutral level of 50.
But prices are strongly influenced by the Fed’s monetary policy
One of the most important elements impacting the price of gold is the US monetary policy, as the Federal Reserve (Fed) has the power to modify the amount and the value of money in the United States. Any change in American monetary policy has a significant impact on the American Dollar and the bond market, which, in turn, impacts the value of Gold.
Remember that the price of Gold is in USD, which means that they’re both negatively correlated. The price of the precious metal drops when the USD strengthens because it becomes more expensive for owners of foreign currencies to buy Gold, which tends to lower Gold demand (and vice-versa).
When the Fed tightens its monetary policy, the value of the American Dollar increases because investment opportunities in USD are more potentially profitable than in other currencies that have lower interest rates. Because of the Fed’s action this year, the USD has strengthened against its peers, which might have pressured Gold prices.
But that isn’t the only reason.
As interest rates rise, other, non-risky assets that are seen as safe-haven assets, such as U.S. treasuries, become a more appealing investment option. Investors can indeed make greater profits from those assets that do not bear (almost) any risk, while Gold doesn’t provide investors with any returns.