Gold sank to its lowest level this year after two Federal Reserve officials struck a hawkish tone on how large upcoming interest rate hikes by the US central bank will need to be.
The prospect of a return to 50 basis point increases by the Fed have diminished gold’s appeal, with the precious metal less attractive at times of rising interest rates due its lack of yield. Add in the US dollar strengthening on the back of this toughening rhetoric from both James Bullard and Loretta Mester and the macroeconomic environment looks unfavourable for gold after enjoying a positive opening month of the year.
Gold was always at risk from the kind of reality check that is currently being delivered to markets with the precious metal trading at levels in excess of $1,900 an ounce that were based on the point in time when the Fed had stopped hiking rates rather than the current status where more increases are still likely. As markets rush to price in more short-term interest rate moves, the price of gold has tumbled by well over $100 an ounce to lose all of the gains it built up in January and find itself back at the level it was at the end of 2022.
The factor that gold investors will be clinging on to during this downtrend on prices will be that the strength of support from central banks, notably Turkey, China and India, will ensure that the price doesn’t fall that much lower and soon starts to stabilise. However, while the downside could be capped, it is hard to see gold making any upward moves in the short-term, at least until the next Fed meeting.
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