By Yusuf Khan

 

The rising dollar and interest-rate hikes from central banks are likely to act as headwinds for gold prices in the second half of the year, but inflation worries and recession risks will help demand for the precious metal, according to the World Gold Council.

In its mid-year outlook, the WGC said rising interest rates from the U.S. Federal Reserve and the Bank of England had pegged back gold in the second quarter, having finished the first half of 2022 just 0.6% higher despite seeing significant price hikes at the start of the war in Ukraine.

Going forward, higher nominal interest rates and a "potentially stronger dollar" are likely to be two key headwinds for the precious metal, with the WGC noting that most market participants expect rates to rise further in the second half of this year.

"The broader thing will be what happens on the growth versus inflation front," said John Reade, chief market strategist at the WGC, in an interview.

"Whether hikes and the hikes priced into a curve are going to bring down inflation and allow [Fed Chairman Jerome] Powell in a meeting or two's time to signal a slowing in rate hikes or even a pause--that looks really optimistic to me," he added.

The WGC said in its report that for now, it expects inflation to linger through the second half of the year despite some analysts expecting cooling, because of "commodity-related supply-chain disruptions from the pandemic and the Ukraine war" and also "tight labor markets, causing concerns that wages/labor costs may rise further."

This lingering inflation is likely to be a tailwind for gold, helping to balance the effects of monetary policies, with the metal historically performing well during similar periods. A "need for effective hedges that overcome potentially higher correlations between equities and bonds" would also help provide support, the WGC said.

The WGC said consumers were likely to face hurdles going forward and that a widespread economic slowdown would put "pressure on consumer demand for gold, particularly with many markets seeing notably higher local gold prices." In particular, Chinese and Indian demand would struggle due to Covid-19 lockdowns and rising economic worries, respectively.

 

Write to Yusuf Khan at yusuf.khan@wsj.com

 

(END) Dow Jones Newswires

July 07, 2022 08:14 ET (12:14 GMT)

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