For the third quarter, gold prices lost 10% and are now around $1,630 per troy ounce. The fall of the precious metal accelerated in August-September amid tightening of the Fed's monetary policy, the strengthening of the dollar and the growth in yields of US government bonds (Treasuries). Since the beginning of the year, gold has lost about 11% in price.
Fed policy. In the third quarter, the Fed continued its policy of tightening monetary policy. In September, the interest rate was raised by 0.75 percentage points, to 3–3.25%, for the third time in a row in 2022.
Fed management notes continued inflationary pressure, CPI growth forecasts for the coming years were once again raised: from 5.2% to 5.4% in 2022, from 2.6% to 2.8% in 2023 and from 2.2% to 2.3% in 2024
Historically, inflation has been a positive driver for the growth of gold prices, however, in 2022 it does not support the dynamics of quotations due to the tough position of the Fed. An increase in interest rates increases the yield of conditionally risk-free Treasuries. Relative to the levels at the end of 2021, the yields in the 2–3 year range rose especially strongly. Due to the growth of yields, it becomes less profitable to keep funds in gold at a comparable level of risk, the demand for the precious metal is reduced.
Moreover, strong inflation dynamics may even lead to a negative reaction in gold, as it increases the likelihood that the Fed's tough approach to raising rates will continue. For example, on September 13, CPI data was released, which turned out to be worse than expected - the price index amounted to 8.3% in annual terms against the expected 8.1%. On this news, gold prices lost 1.3% per day.
Geopolitics. The factor of growing tension on the world stage was most acutely felt in March-April. Recent events, including Taiwan, have not led to bursts of sustained growth in gold demand. The geopolitical driver is currently not strong enough and cannot fully withstand the impact of rising interest rates in the world.
Expectations for the IV quarter
The Fed factor remains the key factor for the dynamics of gold in the fourth quarter. As part of his last speech, Fed Chairman Jerome Powell noted the need for further interest rate hikes. For gold prices, this is a negative driver and suggests further pressure on quotes.
At the same time, factors in favor of gold price growth may appear in Q4. To date, most of the way to raise interest rates has been passed - 3-3.25% with a target of 4.4% for 2022, 4.6% and 3.9% for 2023-2024. This is interesting from the point of view that gold prices react to the key rate with a time lag. Gold prices begin to rise in advance of lower interest rates. There was a similar moment in the previous Fed rate hike cycle in 2018. At that time, an ounce of gold was trading below $1,200 long before the end of the cycle. When the regulator ended the series in 2019 and turned back, gold was already worth $1,500 (+25%).
The geopolitics factor is difficult to predict, but the risks here are also rather positive. Now the growing tension on the world stage is being ignored by the market. If the degree of heat, primarily in the US-China line, grows, then this may become an additional driver for the demand for defensive assets, in particular, gold.
As a result, expectations are mostly neutral. The noted positive drivers can rather be attributed to positive risks, while the deterrent effect from the growth of interest rates is obvious and affects at the moment. In the fourth quarter, gold prices may fluctuate in the range of $1570-1730 per ounce.