Barely a month ago, there were whispers in most corners of the market that gold is going to surpass $2,000.
Now, not many people are certain about the precious yellow metal holding onto the $1,800 level that has been its support since Christmas. It might not even surge above the $1,900 mark that it lost some three weeks ago.
For the fourth consecutive week, longs holding gold futures booked losses – if not real, at least on paper – after some uninspired trades that barely rose past the mid-$1,800 level.
Gold for April delivery on New York’s Comex settled to end the week at $1,817.10 an ounce, down $9.70, almost 0.5% on the day. For this week, the benchmark gold futures contract lost around $23.30, or 1.3%.
The spot price of gold, more closely followed than the futures by some traders, was trading at $1,811.45 by 14:25 ET (19:25 GMT), down $10.86, or 0.6% for the day.
At the core of the gold trade is the dropping feeling that the yellow metal might get consumed by the same inflation it is supposed to be a hedge against, as the Federal Reserve gets ready to intensify rate hikes once more amid the stickier-than-thought price growth.
The latest trouble to the gold market came in form of the Fed’s preferred inflation indicator – the Personal Consumption Expenditures (PCE) Index – which grew 5.4% in the year to January, beating projections for the month and its previous growth in December.
The dollar hit a 7-week high against most of the other currencies while the yields on the 2-year US note reached their highest since 2007 amid a near reach of the 4 percent level for the benchmark 10-Year note.
All of them were on the back of expectations that the Federal Reserve will resort to more hawkish monetary action coming amid the “hotter inflation in the U.S.,” economist Greg Michalowski highlighted in a recent post.
US consumer sentiment, in the meantime, reached a 13-month high in February, based on a survey by the University of Michigan that indicated that Americans are more optimistic about spending at a time the Fed needs them to show some restraint.
A top analyst at online trading firm OANDA, Ed Moya, stated:
“Hot PCE inflation and improving consumer sentiment just broke gold’s back. Gold is in the danger zone as Fed rate hike bets are getting ramped up and as rate cut calls get pushed deeper into next year.”
“Gold still has a bullish playbook for later this year, but the bearish momentum could be strong here if we see a break of the $1,800 level.”
Economists had expected the annualized January growth of the PCE would at least match December’s 5%, after aggressive rate hikes by the Fed for nearly a year now.
Without the volatile energy and food prices, the so-called core PCE Index increased by 4.7% in the 12 months to January compared to a projection of 4.3% and a previous growth of 4.4% in the year to December.
The Fed president for the Cleveland region, Loretta Mester, mentioned in a statement published by Bloomberg:
“The PCE report shows that the Fed needs to do a little more. It is gratifying that inflation declined from [its] peak, but more is needed.”
President Joe Biden agreed in a statement released by the White House:
“Today’s report shows we have made progress on inflation, but we have more work to do.”
The CPI, a wider gauge of inflation, stood at a 40-year high of 9.1% for the year to June. It has now moderated since to reach an annualized growth of 6.4% in January. The Fed’s target for inflation is only 2% per year.
A board member at the Fed, Philip Jefferson, said:
Buy Bitcoin Now“Wage growth is still running too high to be consistent with timely, and a sustainable return to 2% inflation.”
To cool down the runaway price growth, the Federal Reserve added 4.5% (450 basis points) to interest rates since March 2022 through eight hikes. Before that, rates stood at almost zero after the global pandemic in 2020.
The Federal Reserve’s first post-COVID hike was a 25-basis point increase in March. Then, it moved up with a 50-basis point hike in May. After that, it issued four consecutive jumbo-sized hikes of 75 basis points between June and November. Since then, it has returned to a modest 50-basis point increase in December and a 25-basis point hike in February.
Rate expectations for the Federal Reserve’s March 22 policy meeting, monitored by foreign exchange traders, remained at 25 basis points on Friday. But, it might end up being double as much amid growing calls for tighter policing from the central bank’s hawks.
