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In Spite of Recession Fears,
Dollar Strength Undermines
Recovery Prospects for Gold

Following a strong rally in the first quarter of 2022, in the wake of the start of the Russia-Ukraine conflict, the gold price has subsequently turned decisively lower in the second quarter note analysts at the London-based Metals Focus. Here are the views of the Metals Focus precious metals team on the dollar strength and gold.

The near unabated dollar strength has been the key factor weighing on gold, with the dollar index (DXY) hovering near a two decade high. This in turn reflects expectations about the pace of Fed policy tightening, which has changed dramatically this year.

Focusing on the Fed’s monetary policy expectations, and so leaving aside the near-term impact of geopolitical tensions, these have been a key driver of financial market sentiment and in turn for the dollar, yields and precious metals this year. With heightened risk surrounding growth, energy shortages and inflation, investor expectations about the trajectory of Fed rate hikes have fluctuated dramatically this year, often shifting in a span of weeks rather than months. For instance, from expecting gradual rate hikes at the end of 2021, markets started calling for a steeper rate hike cycle as the war amplified inflationary pressures over Q1.

To provide a background, with inflation continuing to run hot and above expectations, investors have increasingly priced in even more aggressive policy actions as the year has progressed. For instance, the Fed Fund rate is currently expected to peak around 3.5-3.75% by mid-2023.

This is a notable change compared to just three months ago when investors saw the Fed Fund rate peaking at around 3.25% in 2024. To provide further context and underline the scale of the shift in expectations in just six months, Fed fund futures at the beginning of this year suggested that interest rates would peak at 2% by 2026.

Against this backdrop, it is not surprising that market volatility has picked up this year in response to fast changing policy expectations not just in the US, but also globally, as central banks looked to rein in inflation. That said, even as several central banks have hiked rates this year, the pace of these rate gains has been nowhere near as quick as those implemented by the Fed, especially in advanced economies. The ECB is yet to raise rates this year as the Russia-Ukraine conflict has meant that EU economies are far more vulnerable to slowdown or a recession. Elsewhere, the Bank of Japan has remained against rate hikes, which has meant that interest rate differentials have increasingly favoured the US dollar.

Against this backdrop, the dollar has been gained strongly so far this year, with the DXY now at two-decade highs.

With respect to gold, even as economic uncertainty abounds, dollar strength has undermined its prospects this year. In contrast to a positive correlation during February and March, when geopolitical tensions lifted both safe haven assets together, the 7-day rolling correlation between gold and the DXY has been negative over the last quarter. That apart, as inflation remains high and policy expectations hawkish, nominal yields have jumped notably this year too, pushing the 10-yr TIPS yield or real yields into positive territory since late April.

While real yields (10-yr TIPS), currently ~0.67%, still remain historically low, the fact that they have turned positive for the first time since March 2020 is important from the perspective of market sentiment.

Another key narrative that has worked against gold is that the possibility of stagflation, especially in the US has faded in recent months as the labour market still remains strong at a time when inflation is potentially cooling. After a strong rally in the early part of the year, commodity prices have corrected sharply over the last two months which has led to a fall in forward inflation expectations. Crucially, even energy prices have cooled significantly, which has allayed fears about inflation running out of control. For instance, the Bloomberg Commodity Spot Index is down 17% from its May highs and the benchmark Brent oil price has seen a similar correction from its March peak of $128. As a result, with fears about an outright recession still not firmly entrenched, investors still expect the Fed to keep hiking in the short to medium term. This is likely to keep the possibility of a further price correction in gold relatively high in the short term. That aside, if other central banks, mainly the ECB starts raising interest rates meaningfully, the dollar index could start to retrace some of the gains seen this year and in turn help gold prices stage a rebound. A short-term recovery aside, this scenario is however unlikely to alter the broader downside trajectory for gold.

That being said, several upside risks remain which could help the gold price recover meaningfully from current levels. These include a broad recession, or a synchronized global slowdown exacerbated by COVID worries in China or energy shortages in Europe during the winter months. This in turn could mean that rate hikes may peak early next year and central banks may potentially start cutting interest rates to prevent a major slowdown.

While current expectations of Fed policy derived from Fed Fund futures do suggest that rate cuts are possible next year, gold prices have so far not reacted positively to such possibilities. This could however change if economic data start pointing out that recessionary pressures are building in earnest.

Editor’s Note: Metals Focus is a leading, independent precious metals research consultancy providing in-depth consulting services to mining companies, corporations, investment funds, central banks, financial institutions and governments based on their extensive precious metals research. For more information on the services offered by Metals Focus, visit


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