(Kitco News) Following another 75-basis-point hike from the Federal Reserve, gold looks to be the standout metal in the second half of the year, especially in light of lower industrial metals prices signaling deflationary forces coming back to the fore, according to Bloomberg Intelligence.
Following the Fed's July decision, gold jumped around $30, with August Comex gold futures last trading at $1,749.30, up 1.76% on the day. This comes after gold got stuck in consolidation mode following a sudden drop to the $1,700 an ounce level, which was led by a strong U.S. dollar.
"The 75-bp rate hike at the July meeting could solidify foundations for an elongated bull market in gold and U.S. Treasury bonds. Copper and gold are a bit too cold at the end of July, but we see greater industrial metal headwinds," Bloomberg Intelligence's senior commodity strategist Mike McGlone said in a report this week.
Bloomberg Intelligence sees gold as a potential standout in the second half of the year after delivering steady results in the first half of 2022. Year-to-date, gold is down 4.2%.
McGlone is not ruling out deflationary forces making a comeback following Fed's aggressive rate hikes.
"The Fed hiking rates in 2022 at about 3x the pace expected at the start of the year is a strong headwind for most assets, but it's the endgame that typically matters to bottom gold. We see plunging copper as a sign of a resumption of deflationary forces to buoy gold," he said.
In just 40 days, the Fed raised rates by 150 basis points. And that might be enough for gold to find its bottom and kick off the next rally.
"Gold and Treasury long bonds … may be top beneficiaries when tightening subsides. Rising rates typically buoy bond yields in the short term, but since the 75-bp hike on June 15, long-bond yields have declined," McGlone said. "Gold began to recover from about $1,200 an ounce around the time that bond yields peaked four years ago, and we see rising potential parallels at about $1,700. The metal is quite discounted to most moving averages in the midst of an elongated upward trajectory."
Helping the situation is Fed Chair Jerome Powell's comments that the U.S. central bank might soon be ready to slow down its tightening.
On Wednesday, Powell highlighted that the U.S. monetary policy is now at neutral, which means that the Fed could soon start slowing its rate hike pace.
"Now that we're at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven't made a decision when that point is, but intuitively that makes sense. We've been front-end loading these very large rate increases. Now we're getting closer to where we need to," he told reporters.
Powell also disagreed that the U.S. economy is currently in a recession, despite the GDP contracting for the second quarter in a row.
"I don't think the U.S. is currently in a recession. There are too many areas of the economy that are performing too well. I would point to the very strong labor market. [It is] true that growth is slowing … [But generally], GDP numbers [are] revised pretty significantly. You tend to take first GDP reports with a grain of salt," Powell said, referencing Thursday's upcoming first reading of the Q2 GDP report.