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Gold futures: Spot price bounces off 6-month low, but outlook remains uncertain

By Fitri Wulandari

Edited by Georgy Istigechev

14:36, 28 September 2022

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0.402 +1.770%

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Gold futures are on a downward trend as major central banks worldwide continue to hike rates – Photo: Andrey Rudakov, Bloomberg Creative / Getty Images

Gold has continued its downward spiral as central banks seem determined to continue on a path of aggressive interest rate hikes to tame soaring inflation.

Gold's lustre as a safe haven asset has dimmed, while the US dollar has strengthened as a result of the monetary tightening cycle unleashed by the US Federal Reserve (Fed).

On 26 September, the commodity dropped to its lowest level since early April 2020 as the market factored in expectations of the Fed hiking rates by another 75bps at its 2 November meeting.

Gold live price chart

What is the outlook for gold futures prices? Will there be any tailwinds for gold futures to reverse course and get their shine back?

What are gold futures?

There are many ways to invest in gold. One of them is through futures contracts. But what are gold futures?

Futures are contracts between sellers and buyers in which the buyers commit to purchasing a commodity or an asset at a specified quantity and price on a future date. Contracts are normally traded on stock exchanges.

So, "gold futures" are gold contracts in which the buyer commits to purchasing the precious metal at a predetermined price and quantity at a future date.

While there are hundreds of futures contracts traded on different exchanges around the world, gold futures at the Commodity Exchange (COMEX) in New York, operated by the Chicago Mercantile Exchange Group (CME), are the global benchmark for gold futures markets.

COMEX was established in 1933 by the merger of the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange and the New York Hide Exchange. Since 1994, COMEX has only traded gold, silver and copper contracts.

The Shanghai Futures Exchange (SHFE) and Tokyo Commodity Exchange (TOCOM) also trade gold futures contracts.

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Gold historical performance

Gold 5Y Price Chart

Gold futures soared above the $2,000 mark for the first time in August 2020. The commodity touched an all-time high of above $2,082 an ounce on 7 August 2020, according to Nasdaq’s gold futures history.

The bullion’s status as a safe haven shone during the Covid-19 pandemic in an ultra-low-interest rate environment.

Central banks had cut policy rates to near-zero or zero levels to support national economies as they reeled from the adverse impact of pandemic restrictions. Governments offered various stimuli to maintain growth. In 2020, gold gained more than 24%.

Entering 2021, gold started to weaken as the pandemic eased and vaccination rates grew. Central banks began to reduce stimulus measures and increased policy rates to combat inflation. The metal dropped 3.5% in 2021, erasing all its gains from the previous.

In early March 2022, gold briefly crossed $2,000 an ounce, rallying near an all-time high hit in August following Russia’s invasion of Ukraine. It did not last long. Gold’s lustre has continued to dim since March as soaring inflation prompted the Fed and other central banks to keep going with aggressive rate hikes.

Gold futures analysis

Gold has fallen nearly 20% since its near-record high in March, as it became clear that central banks were raising interest rates aggressively to combat stubbornly high inflation. A tug of war between soaring inflation and monetary policy has capped gold futures prices.

A stronger US dollar, which has reached 20-year highs on the back of the Fed’s rapid interest rate hike cycle, and rising US 10-year bond yields have added pressure to non-interest yielding gold.

Capital.com analyst Piero Cingari said gold was trading on the verge of a bear market on 23 September.

“Gold has held up relatively well in comparison to other major assets, excluding the dollar, of course. Gold’s year-to-date performance was superior to both the stock and the bond markets,” Cingari noted, adding that the price of the commodity could have potentially been even lower.

“The Federal Reserve's rate hikes have exerted substantial downward pressure on gold this year, but not as much as would be predicted by real rates. Using US 10-year real yields as a guide, the price of gold should have been between $1100 and $1300 per ounce.”

As of 27 September, gold futures are trading at around $1,641 an ounce. On 26 September, gold futures’ most active contract closed at $1,633.4, the lowest since April 2020, as the US dollar pushed to a new high and US 10-year note yield moved close to 4%.

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Silver

23.18 Price
+1.770% 1D Chg, %
Long position overnight fee -0.0182%
Short position overnight fee 0.0065%
Overnight fee time 22:00 (UTC)
Spread 0.040

The Fed raised its policy rate by another 75 basis points (bps) at the 20-21 September meeting, taking its Federal Funds Rate to the 3%-3.25% range, in line with market expectations.

Commodity strategists Daniel Hynes and Soni Kumari at Australian bank ANZ commented on the hike in a note on 16 September:

“The macroeconomic backdrop remains challenging. The Fed made it clear that it is leaning toward doing too much tightening rather than too little. With inflation stubbornly high, interest rate hikes will be aggressive.

Rising geopolitical and economic risks are doing little to entice safe haven buying, with the USD still the asset of choice.”

Gold futures have dropped around 10% year-to-date, as of 27 September.

Analysts' views: Tightening monetary policy remains a headwind

Capital.com analyst Daniela Hathorn was bearish in her gold futures analysis, as there was no clear end in sight with the US rate hikes. A price correction isn’t likely anytime soon, as the US dollar hasn’t peaked, she added.

“The main driver needed for a rebound in gold would have to be a shift in risk factors, whereby economic recession becomes a greater concern than inflation. That would eventually lead to a correction in the Fed's hiking path and would in turn fuel gold's demand as a haven against economic turmoil,” Hathorne said.

In a 22 September note, Fitch Solutions also turned more bearish on gold futures prices, noting:

“On the upside, we expect gold to remain well-supported above its pre-Covid levels, due to ongoing recession fears, elevated geopolitical tensions (largely stemming from Russia and Ukraine) and lingering risks from the pandemic itself.”

On the other hand, signs of easing inflationary pressure and rising nominal rates boosted US real bond yields and further buoyed the dollar, exerting downward pressure on gold, Fitch Solutions added.

Because of the US dollar’s strength, ANZ Research anticipated that gold would continue to underperform. The firm predicted that the US dollar would peak in the first quarter of 2023 as the euro weakens amid the European energy crisis.

“We now think USD strength will last longer than we had thought. Labour resilience means the Fed will have to hike further than the market is expecting. Deteriorating liquidity conditions and higher US yields will feed haven flows and add risk premium,” wrote ANZ Research’s Hynes and Kumari on 16 September.

Gold could revive its haven demand when interest rate hikes to combat inflation slow economic growth and increase the risk of protracted recession.

“If the Fed turns dovish and inflation remains high, this could keep real rates low and supportive for gold prices. Deteriorating geopolitics could also be a potential tailwind,” Hynes and Kumari added.

While acknowledging that the Fed’s hawkish stance and stronger US dollar would continue to be headwinds for gold, Bank of America (BofA) expected gold to stabilise below $1,700 by the end of 2022.

“For gold to hit $1,500/oz, nominal 10-year rates would have to hit 4%, which looks difficult against the backdrop of a slowing US economy,” BofA wrote in its note on 12 September.

BofA expected an upside for the price of gold moving into 2023 as the Fed signalling to slow its aggressive rate hike cycle may bring new buyers into the market.

Gold futures: Price targets for 2022 and beyond

As monetary policies may remain a headwind for gold, what is the outlook for gold futures?

Capital.com analyst Daniela Hathorn said:

“The outlook for the rest of 2022 remains bearish for gold unless the economic playing field varies drastically. This will be the same during most of 2023, at which point peak interest rates are expected to be reached and when the risk of recession becomes greater.”

On 22 September, Fitch Solutions lowered its gold forecast to $1,800 an ounce for the full-year average of 2022 from the previous estimate of $1,850. The precious metal was predicted to stay at $1,800 levels in 2023.

On 16 September, ANZ Research projected the price of gold to average $1,762 an oz in 2022, dropping to $1,610 in 2023 and $1,500 in 2024.

BofA saw an uptrend in its gold futures prices outlook, expecting the metal to average $1,938 an oz in 2022, rising to $2,100 in 2023. Bullion was projected to drop to $1,945 in 2024 before rebounding to $1,958 in 2025 and $1,969 in 2026.

It's important to remember that like any market, the gold market is extremely volatile, making it hard to predict gold prices over a short period of time and even more difficult to provide longer-term forecasts. As a result, analysts and algorithm-based price prediction services can be wrong.

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinions before making any investment decision. Keep in mind that past performance is no guarantee of future returns.

FAQs

Are gold futures a good investment?

Investors may decide to keep some gold exposure in their portfolio as a hedge against falling stocks and bonds and economic uncertainty.

Whether gold is a good investment for you will depend on a variety of factors, including your risk tolerance, market outlook, and whether you anticipate a recovery or further decline. As gold futures typically move in the opposite direction to market and economic sentiment, you should conduct research on national and international economic indicators such as GDP growth rates, interest rates, inflation, productivity and energy prices, among various others.

Remember that past performance is no guarantee of future returns. Never invest money that you cannot afford to lose.

How do I invest in gold futures?

You need to open an account at a brokerage to enable trading in gold futures. Gold exchange-traded funds (ETFs) enable you to invest in gold without buying gold futures or physical gold. SPDR Gold Shares is one example of a gold ETF.

Always conduct your own due diligence and remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and investment goals. Remember that past performance is no guarantee of future returns. Never invest money that you cannot afford to lose.

What happens when gold futures expire?

When a gold futures contract expires, the clearinghouse – the intermediary between parties in a financial market – matches the holder of a long position against the owner of a short position. The underlying asset is then transferred from the short position to the long position. The holder of the long position has to deposit the entire contract value with the clearinghouse before taking delivery of the asset.

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