Gold prices fell amidst stronger signals from the US Federal Reserve that rates may be raised sooner or faster than expected, a Jan 6 market update by Phillip Futures highlights.
“Gold prices slumped as the minutes of last month's Federal Open Market Committee (FOMC) meeting indicated with even more conviction than investors had expected that Fed policymakers are more concerned about inflation getting out of hand,” the market update reads.
The update also notes that CME Group’s FedWatch tool indicated that the probability that the Fed would lift interest rates in March - the first time since the onset of the pandemic - rose to greater than 70%.
Futures on the federal funds rate on Wednesday have priced in a roughly 80% chance of a quarter-percentage point rate hike by the Federal Reserve at the March meeting. For the year, rate futures are implying about three rate increases in 2022.
Following the release of the minutes in the early morning hours of Jan 6 Singapore time, February gold futures slumped at the opening of trade. As of 8.15am SGT, the gold for February delivery on Comex was down 0.86% at US$1,809.4 ($2,453.06) an ounce
“The contract had risen to a high US$1,830 on hawkish European Central Bank comments earlier on Wednesday which pushed the EuroFX higher at the expense of the US dollar,” Phillip Futures adds.
See also: Should gold investors fear a strong US dollar?
US Treasury yields rose following the release of the minutes, with the two-year Treasury Note yield pushing up to levels seen last during pre-pandemic times, while the 10-year Treasury yield increased to its strongest level since April 2021. Meanwhile, the US dollar recovered from an earlier slump.
From a technical angle, Phillip Futures says that benchmark February gold had not been able to follow though above $1830 after penetrating the resistance but had fallen back in the absence of “earth moving fundamentals”.
“Gold prices are expected to continue to form a strong base before moving high on safe-haven demand,” the update states.
See also: Go Gold
Phillip Futures does not expect the Fed’s actions to rein in inflation and reduce their bloated balance sheet to benefit gold as much as other assets such as the Dollar and Treasury Yields.
Nonetheless, in its market update, it also points out that gold prices would not free-fall as real rates and real yields would remain at a historically low level until the coast is all clear from the strains of Covid-19, even with a quarter percent rate hike by the Fed.
Cover photo: Jingming Pan/Unsplash