By Barani Krishnan
Investing.com — The world’s much-touted hedge against inflation is again finding it difficult to live to its billing, usurped by its rival’s biggest rally in seven years.
Gold finished April down almost 2% despite a 1% rise on Friday, marking its second monthly loss since the start of 2022, despite holding above the relatively bullish level of $1,900 an ounce level.
Gold’s decline came as the , which pits the greenback against six other major currencies, soared more 4.6% for April, its most since January 2015. Of the 20 trading sessions for April, the Dollar Index had only declined in four, in one of the most remarkable winning streaks for the greenback.
The dollar’s outsize rally came in anticipation of a higher rate regime the Federal Reserve was expected to adopt over the remainder of 2022 — and possibly 2023 — as the central bank aims to contain U.S. inflation growing at its fastest pace in four decades.
“The dollar rally has been relentless and it’s been a real drag on the yellow metal — which begs the question, is anything going to stop the dollar in the near term?” asked Craig Erlam, analyst at online trading platform OANDA. “If not, what does that mean for gold?”
As Friday’s session wrapped April trading for markets, on New York’s Comex stood at $1,911.70 — up $20.40 or 1.1%, on the day. For the month though, it was down 1.9%, even as it showed a gain of 4.5% on the year.
Just on April 18, June gold hit a six-week high of $2,003 on concerns that the United States could run into recession from aggressive Fed actions to control inflation. Gold typically acts as a hedge against economic and political fears.
A succession of Fed speakers had, however, soothed some market worries that the economy could turn negative from the central bank’s attempts to put a lid on price pressures growing at their fastest pace in 40 years.
While fears of a hard landing for the economy have not evaporated, optimism, especially over the sterling labor market, have won over some pessimists.That has sent the dollar — the chief beneficiary of a rate hike — rallying instead, making gold and other safe-havens suffer.
““It’s been an awful couple of weeks for gold since breaking above $2,000 for the first time in over a month,” Erlam noted. “Gold will continue to see safe haven and inflation hedge appeal so I don’t see the recent rate of decline continuing, even if the dollar remains strong. That said, there isn’t much of a bullish case for the yellow metal if the dollar continues to tear higher.”
In Thursday’s trade, the , which pits the U.S. currency against six major rivals, hit a 25-month high of 103.945.
U.S. bond yields, which often run side-by-side with the dollar, have also risen in two of the past three sessions, after decoupling lately from the greenback. The yield on the rose almost 24% for April — its second blockbuster month after a near 29% gain in March.
After slashing U.S. interest rates to nearly zero at the height of the coronavirus outbreak, the Fed’s policy-making Federal Open Market Committee, or FOMC, approved the first pandemic-era rate hike on March 16, raising rates by 25 basis points, or a quarter point. That brought key lending rates to between 0.25% and 0.5%.
Many FOMC members have concluded since that the March hike was too tame to rein in inflation galloping at 40-year highs. They are pushing for “one to two” 50-basis point hikes in the near term to get a better grip on fighting inflation. Expectations are that the FOMC meeting on May 3-4 will agree on the first of such 50 bps hikes.
All in, the FOMC members are considering as many as seven rate hikes this year and expect monetary tightening to continue into 2023 if inflation does not drop to desired levels.
But economists also caution that the economy could go into recession if rates rise too much, too fast.
After a 3.5% contraction in 2020 gross domestic product forced by the coronavirus crisis, the U.S. economy grew by 5.7% in 2021 — the biggest calendar-year growth since 1984.
But inflation grew even faster, with the Fed’s preferred price indicator — the Personal Consumption Expenditure Index — rising 5.8% for all of last year, for its largest annual increase since July 1982.
Inflationary pressure has continued in the first quarter of this year, with the so-called PCE Index growing 6.6% in the year to March, while GDP fell 1.4% for January-March. If the GDP contracts in the second quarter as well, the United States would automatically be in recession.
The last time the economy slipped into recession — which is technically defined as two straight quarters of negative growth — was in the aftermath of the 2020 Covid-19 outbreak.
The University of Michigan said in its latest consumer survey released on Friday that many Americans believed the Fed will have a hard time succeeding with its goal of providing a soft landing for the economy from aggressive rate hikes planned by the central bank to contain runaway inflation.
“The goal of a soft landing will be more difficult to achieve given the uncertainties that now prevail, raising prospects for a halt, or even a temporary reversal, in the Fed’s interest rate policies,” Richard Curtain, chief economist of the consumer surveys, said in the university’s final consumer poll for April.
“The probability of consumers reaching a tipping point will increasingly depend on prospects for a strong labor market and continued wage gains,” Curtin said. “The cost of that renewed strength is an accelerating wage-price spiral.”
The labor market has been the brightest spot of the U.S. economy in recent times, with employment having hit record highs after rebounding all-time lows just two years ago.
Joblessness among Americans reached a record high of 14.8% in April 2020, with the loss of some 20 million jobs in the aftermath of the coronavirus breakout. Employment has, however, been stellar over the past year, with the jobless rate moving down to 3.6% in March. A jobless rate of 4.0% or below is regarded by the Federal Reserve as “maximum employment”.