For Gold Bulls, the Fed’s Hawkish Turn is a Blow. Here’s Where the Commodity Could Be Headed Next.
A worker places a 20 kilogram gold brick on a tray at the ABC Refinery in Sydney, Australia on Aug. 5, 2020.
AFP via Getty Images
Duck for cover, gold bulls.
That was the message the market seemed to be sending on Thursday, as the precious metal tumbled nearly $60, or near 3%, to $1,806.20 an ounce, following a curveball from the Federal Reserve.
On a continuous contract basis, gold is trading at levels not seen since early May. The daily loss is shaping up as the biggest since a 4% drop on Jan. 8, according to FactSet.
While the central bank held policy steady, it also signaled faster and sooner interest rate increases, with its forecast suggesting two increases in 2023. And the Fed increased its inflation forecasts for this year and next.
Recent data showing surging prices had led many to believe the Fed would at least begin early discussions about reining in some of its ultra-accommodative policy aimed at cushioning the economy from the Covid-19 pandemic. But the outcome was far more hawkish than some expected.
Gold for August delivery settled slightly higher at $1,861.40 on Wednesday, but began to fall in electronic trading after the Fed announcement and kept going. That is as Treasury yields climbed across the board—the yield on the two-year note was hovering the highest level in a year—and the dollar surged.
“Higher yields increase the opportunity cost of holding the non-interest-bearing gold, and prospects of a further rise in yields should cap the upside potential in the yellow metal despite the rising inflationary pressures. A sustained positive pressure on yields could send the price of an ounce sustainably below the $1800 level,” said Ipek Ozkardeskaya, senior analyst at Swissquote, in a note to clients.
Indeed, gold bulls need to defend that line in the sand, said Edward Moya, senior market analyst at Oanda.
“The Fed’s hawkish pivot is a major buzzkill for gold bulls that could see some momentum selling over the short-term. Short-term Treasury yields will continue to rise and that should provide some underlying support for the dollar, which will keep commodities vulnerable,” Moya told clients in a note.
Silver prices tanked along with gold, with July futures trading down nearly $1 to $27.75 an ounce. A host of industrial metals prices were also lower, a day after China announced plans to release national reserves of industrial metals to cool soaring commodities prices.
