It's Fed Decision day.
Gold prices ticked higher on Wednesday, supported by a pullback in the dollar, now investors are focused on the U.S. Federal Reserve rate decision and outlook on future pace of interest rate hikes as the central bank’s policy meeting concludes later in the day. Will J Powell be hawkish or dovish on future hike hints?
Latest data today shows U.S. job openings unexpectedly rose in September, suggesting demand for labour remained strong, providing further evidence that rapid interest rate hikes have yet to bite hard in the real economy. How will the FED see this, the mantra is all about inflation being stemmed.
Federal Reserve Governor Lisa Cook crossed the wires in recent trade and was reported to have that inflation remains unacceptably high and interest rates will need to keep rising to get it under control. “Inflation is too high, it must come down and we will keep at it until the job is done,” she said Thursday during opening remarks at a panel discussion with business and community leaders in Spartanburg, South Carolina. “This likely will require ongoing rate hikes and then keeping policy restrictive for some time.” She noted ongoing rate increases will be required.
Investors widely expect the Fed will raise its benchmark overnight interest rate by 0.75 basis points, the fourth such increase in a row.
Gold is highly sensitive to rising U.S. interest rates, as that increase the opportunity cost of holding the non-yielding metal and boosts the dollar.
Global factory output weakened in October as widespread recession fears, high inflation and China’s zero-Covid policy hurt demand, business surveys showed on Tuesday, adding to persistent supply disruptions and darkening recovery prospects.
Philadelphia Fed President Patrick Harker said on Thursday they are not done with raising its short-term interest rate target amid very high levels of inflation, as reported by Reuters. He added the Fed will find space “next year to pause the tightening process”. According to him, the interest rate will be above 4% by the end of 2022.
Many investors and market analysts believe that, since rising interest rates make bonds and other fixed-income investments more attractive, money will flow into higher-yielding investments (such as bonds and money market funds) and out of gold when rates move higher. Therefore, when the Federal Reserve raises its benchmark federal funds rate, weakness in gold should follow.
The U.S. dollar is viewed by some investors as an important driver for gold prices because the metal is dollar-denominated. When the greenback falls, consumers can buy more gold with the same amount of dollars, which results in increased buying interest (demand) and higher gold prices.
While inflation refuses to go away, gold refuses to go up!
The fact that inflation remains absurdly high (and core inflation is even accelerating) implies that the Fed will stick to its hawkish monetary policy and continue to raise the federal funds rate. As long as the Fed continues to raise interest rates, gold could continue to suffer. Traders are betting on another 75 basis points not only in November but in December as well. It means that gold has, unfortunately, further room to go down this year.
Strong dollar weighs on gold!
Softer US yields and limited risk appetite should normally play in favour of gold, but we see the contrary happening. The strength of the US dollar clearly overshadows gold and prevents the yellow metal from gaining at a time it could potentially gain.
Demand for gold as insurance against inflation promises to decline!
The latest financial market dynamics (falling equity prices and yields) suggest the markets are banking on a recession. Meanwhile, central banks are only picking up speed in tightening monetary policy, creating pressure on long-term inflation expectations. In such an environment, demand for gold as insurance against inflation promises to decline in the coming weeks. A reversal in gold may not occur until G7 central banks begin to soften their rhetoric, which could take months.
So, where is Gold going, lets see late in the day.